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EXCELSIOR
PRIVATE EQUITY FUND II, INC.
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ANNUAL REPORT
October 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
To Our Shareholders:
We are pleased to inform you that Excelsior Private Equity Fund II, Inc. (the
"Fund") has made substantial progress in the construction of its private equity
portfolio. As you know, the Fund's investment objective is to achieve long-term
capital appreciation through investment in later-stage venture capital
situations and private middle market companies as well as by investing in
certain private equity funds managed by third parties. To this end, the Fund
completed investments in eight private companies and eight private equity funds
during its first full fiscal year, which ended October 31, 1998.
In constructing the portfolio, we are being careful to diversify our holdings
across a wide variety of companies and funds. With respect to direct
investments, we have invested $46.1 million across eight private companies with
the expectation of adding another 10-15 private companies to the portfolio as
we complete our investment cycle in the next two years. During the life of the
Fund, our percentage of assets invested in private companies is expected to
grow from its current 24% to approximately 70%.
The remaining assets -- which will measure close to 30% of the Fund, or $59
million -- will be invested in private equity funds managed by third parties.
During fiscal 1998, the Fund made $34 million in commitments to private equity
funds, representing 58% of our total allocation to funds. These commitments
will be drawn by the funds as they construct their portfolios over the next two
to four years. So far, $3.9 million has been drawn on these commitments.
The Fund's cash balances have been invested in temporary investments in
accordance with the provisions in the Fund's prospectus. During fiscal 1998,
the Fund paid dividends totaling $1.7 million, representing income earned on
its temporary investments after deducting management fees and expenses. An
additional dividend will be declared and paid during December 1998.
The Fund's Portfolio as of October 31, 1998:
- --------------------------------------------
Direct Investments
- ------------------
<TABLE>
<S> <C>
Investments held (private) ............... Advantage Schools, Inc.
Classroom Connect, Inc.
Constellar Corp.
PowerSmart, Inc.
Release Software, Corp.
Softcom Microsystems, Inc.
SurVivaLink Corp.
WNP Communications, Inc.
Fund Investments
- ----------------
Investments in third-party funds ......... Advanced Technology Ventures V, LP
Brand Equity Ventures I, LP
Communications Ventures III, LP
Mid-Atlantic Venture Fund III, LP
Morgenthaler Venture Partners V, LP
Quad-C Partners V, LP
Sevin Rosen VI, LP
Trinity Ventures VI, LP
</TABLE>
<PAGE>
Direct Investments
- ------------------
From the hundreds of investment proposals that we reviewed during 1998, we
selected and completed investments in eight unique companies whose prospects
offer exciting opportunities for growth and capital appreciation:
o Advantage Schools, Inc., Boston, MA is a for-profit provider of public school
education management services. Advantage manages charter schools in troubled
urban school districts in cooperation with local partners. Its schools are
publicly funded, receiving per-student capitation rates in line with those
currently received by other schools in the district. Founded in 1996,
Advantage has two schools in its second year of operation, and an additional
six schools opened in September 1998. Early results from Advantage indicate
a profitable business model and superior student performance relative to
comparable public schools. An additional ten schools are planned for 1999.
Other investors include Bessemer Ventures, Fidelity Ventures and Kleiner
Perkins.
o Classroom Connect, Inc., Los Angeles, CA, is a leading provider of
educational Internet products. Specifically, the company offers a variety of
products and services to teachers and school districts wishing to
incorporate the Internet into the classroom. Boasting a selection of over
108 proprietary product and service offerings, Classroom Connect sells
instruction guides, teaching plans, seminars, and unique Internet content
via electronic commerce and direct mail. The company has grown its customer
base substantially and has seen the traffic on its website grow to over 4.6
million hits per month. Brentwood Associates is a co-investor in Classroom
Connect.
o Constellar Corp., Redwood Shores, CA, is a leading provider of enterprise
application integration software and services. Currently serving large
organizations in North America, Europe and Australia, Constellar provides
products and services that work to untangle increasingly complex information
technology environments -- managing data, making it accessible, and moving
it across myriad applications. Constellar's blue-chip customer list includes
Sprint, British Telecom, Deutsche Bank, NatWest, Princeton University,
London Stock Exchange, and General Electric. Co-investors include Brentwood
Associates and Technology Crossover Ventures.
o PowerSmart, Inc., Shelton, CT, is a leading provider of "smart" battery
management products. The company's product offerings are designed to
maximize battery run-times and safety in applications such as laptop
computers, cellular telephones, and camcorders as well as a variety of
hand-held industrial devices. PowerSmart recently introduced two new lines
of Application Specific Integrated Circuits (ASICS) and electronic modules
that offer superior performance and flexibility at competitive prices.
PowerSmart was formed as a spin-off of technology and related assets from
Duracell and is led by a team of technical and management professionals who
had been employed by Duracell prior to their self-initiated spin-off.
o Release Software Corp., Menlo Park, CA, is a provider of electronic software
distribution (ESD) services. Release provides software publishers, software
resellers, and content-driven web sites with technology and services to
establish an Internet-based sales and distribution channel. ESD offers a
fast, efficient and cost-effective alternative to distributing
shrink-wrapped software by mail or through traditional retail channels.
Release is a leading provider of ESD services and has successfully
established relationships with a number of high-volume software publishers
(Symantec, Lotus, Macromedia, Intuit) and software retailers (Egghead,
FutureShop, Compaq). Other investors include Sevin Rosen and Draper Fisher
Jurvetson.
o Softcom Microsystems, Inc., Fremont, CA, designs, develops and markets data
acceleration products used in high-speed communications networks. Softcom's
single-chip network accelerator solutions and integrated subsystems provide
processing capabilities which help alleviate the "data bottleneck" at the
point where baseband LAN traffic moves on to a high-speed broadband
<PAGE>
Internet backbone. The company believes its products allow network equipment
vendors (i.e., Cisco, Nortel, Lucent) to achieve price/performance gains of
more than ten times over current equipment solutions. Other investors include
Sevin Rosen and Sequoia Capital.
o SurVivaLink Corp., Minnetonka, MN, designs, develops and markets a line of
FDA-cleared automated external defibrillators ("AEDs"), which are portable,
emergency medical devices that deliver life-saving electrical shocks to
resuscitate victims of cardiac arrest. SurVivaLink's AEDs are small,
light-weight and easy to use, making them highly suitable for law
enforcement personnel, firefighters and paramedics. Corporations, such as
Quantas Airlines, Ford Motor Company, General Electric and Harrah's
Entertainment, Inc. (casino chain) have started to purchase AEDs in volume
as they seek to protect the lives of their customers and employees. To date,
SurVivaLink estimates that its AEDs have been responsible for saving over
100 lives. Co-investors include Fidelity Ventures, CIBC Wood Gundy Ventures,
and The Spray Venture Fund.
o WNP Communications, Inc., Reston, VA, was the most successful bidder in the
recently completed Local Multipoint Distribution Services ("LMDS") auction
conducted by the FCC. WNP now owns broadband spectrum covering 30 of the top
50 markets at very compelling prices ($1.78 per POP). The company is now
beginning the process of building out its network with the goal of providing
high-speed data services targeted to WAN, Intranet, and Internet
applications. WNP is supported by a strong investor base including Madison
Dearborn, NEA, Columbia Capital, Providence Equity Capital, Alta
Communications, and the Fund.
Fund Investments
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The Fund's investment strategy includes an allocation of up to 30% of its
assets for investment in private equity funds managed by third parties. In
making our fund investments, we have three objectives in mind: (1) to generate
high rates of return, (2) to provide additional diversification to the Fund,
and (3) to generate co-investment opportunities to enhance our direct
investment program. During 1998, the Fund made commitments to eight private
equity funds ("Private Funds") totaling $34 million. Thus far, $3.9 million of
this aggregate commitment has been drawn. The investment strategies being
employed by these eight funds range from those seeking to invest in start-up,
high-potential businesses to those pursuing buyouts of mature companies. We
believe each Private Fund is managed by experienced investors who are capable
of serving each of the Fund's objectives. Below is a summary of each of the
Private Funds in the portfolio.
Investments in third-party funds
- --------------------------------
o Advanced Technology Ventures V, LP ("ATV") is a $175 million private equity
fund committed to investing in seed to later-stage information technology
and health care companies. The fund has invested in five companies since
ATV's final closing in July 1998. Among these companies are Applications
Networks, a start-up that is developing and marketing risk management record
and control software products, and Coulter Cellular Therapies, Inc., a
pioneer in novel cellular therapies for patients with advanced forms of
cancer and infectious diseases.
o Brand Equity Ventures I, LP ("BEV") is a $95 million fund focused on seed to
later-stage venture financings in consumer and retail companies in the U.S.
The fund is now in the second year of its term and has made six investments.
One portfolio company, Cyberian Outpost (Nasdaq "COOL"), which is an
Internet retailer of computer hardware and software, completed a public
offering in July 1998 and has been performing well. BEV is also an investor
in The J. Peterman Company, a catalogue clothing retailer, and HC Holdings,
which operates The Custom Shop, a provider of custom tailored clothing.
o Communications Ventures III, LP ("CV") is a $100 million fund that invests
solely in the communications sector, targeting early stage companies. The
Fund committed $5M to CV in October 1998. Given the fund's recent closing,
it has made no investments to date.
o Mid-Atlantic Venture Fund III, LP ("Mid-Atlantic") invests in early and
expansion stage technology companies in the Mid-Atlantic region. To date,
the $57 million fund has invested in several
<PAGE>
companies including Integrated Chipware which delivers software components for
rapidly building custom application-specific operating systems and Net2000, a
competitive local exchange carrier serving major East Coast metropolitan
markets.
o Morgenthaler Venture Partners V, LP ("Morgenthaler") invests in companies of
all stages in the health care and technology sectors. Morgenthaler closed
its $250 million fund in July and has completed one transaction to date. In
October, 1998 the fund invested in Comprehensive Medical Management, Inc., a
manager of medical and surgical eye care services.
o Quad-C Partners V, LP ("Quad-C") is a $303 million fund focused on taking
control positions in leveraged acquisitions and recapitalizations of
middle-market companies. Quad-C has made two investments to date, having
effected the acquisition of a company in the insulation distribution market
as well as the purchase of an Atlanta-based retailer of discount furniture.
o Sevin Rosen VI, LP ("Sevin Rosen") is a $165 million private equity fund that
invests in early-stage technology companies. The fund has made eight
investments to date. Included in the current portfolio are Wayport, Inc. which
provides high speed Ethernet connectivity to the Internet for business
travelers in hotels and conference facilities, and Cytokinetics, Inc., which
is developing a drug discovery platform and tool set in the cytoskeletal
"molecular motors" field.
o Trinity Ventures VI, LP ("Trinity") closed on $140 million in September, 1998
and will invest in early to late-stage companies in the software,
communications, and electronic commerce sectors. Loop Ventures, Inc. is
Trinity's first and only investment. The company is developing an electronic
commerce business to allow buyers, sellers, lessors and lessees of
commercial real estate to transact business over the Internet.
In summary, 1998 was a very productive year for the Fund. We committed 40% of
the Fund across eight direct investments and eight investments in Private
Funds, providing a solid early foundation to the Fund's portfolio construction.
Going into fiscal 1999, we are working on a number of exciting investment
opportunities and expect to close on a number of them in the next few months.
Deal flow has remained strong, yielding over 750 specific opportunities during
the last twelve months with increasing volumes of quality opportunities going
into 1999. Overall, we are very pleased with the Fund's progress to date and
are optimistic with respect to the Fund's prospects for creating significant
long-term capital appreciation for our investors.
Respectfully submitted,
/s/ David Fann /s/ Douglas Lindgren
- ------------------------------------- ---------------------------
David Fann Douglas Lindgren
President and Chief Executive Officer Chief Investment Officer
<PAGE>
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 1998
<TABLE>
<CAPTION>
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- --------------- ------------ ----------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 27.69%
$8,000,000 American Express Co., 11/12/98 ........................... 5.27% $8,000,000
8,000,000 Associates Corp., 12/04/98 ............................... 5.06 8,000,000
8,000,000 Chevron Transport Corp., 11/09/98 ........................ 5.45 8,000,000
8,000,000 General Electric Capital Corp., 12/11/98 ................. 5.07 8,000,000
8,000,000 General Motors Acceptance Corp., 11/05/98 ................ 5.23 8,000,000
8,000,000 Prudential Funding Corp., 11/13/98 ....................... 5.28 8,000,000
8,000,000 Sears & Roebuck Acceptance Corp., 11/12/98 ............... 5.30 8,000,000
----------
TOTAL COMMERCIAL PAPER (Cost $56,000,000)................. 56,000,000
----------
CORPORATE BONDS -- 8.50%
5,610,000 Chase Manhattan Corp., 6/15/99 ........................... 8.00 5,703,182
1,000,000 Lehman Brothers Holdings Inc., 11/01/98 .................. 8.88 1,000,000
3,500,000 PepsiCo Inc., 11/01/98 ................................... 7.63 3,500,000
7,000,000 Sears Roebuck Co., 11/01/98 .............................. 8.45 7,000,000
----------
TOTAL CORPORATE BONDS (Cost $17,209,372).................. 17,203,182
----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 36.81%
8,000,000 Federal Home Loan Bank, 11/02/98 ......................... 5.40** 7,998,800
26,641,000 Federal Home Loan Bank, 12/04/98 ......................... 4.75** 26,525,000
14,000,000 Federal Home Loan Mortgage Corp., 11/16/98 ............... 4.78** 13,972,117
10,000,000 Federal Home Loan Mortgage Corp., 11/30/98 ............... 5.09** 9,958,997
16,000,000 Federal National Mortgage Association, 11/04/98 .......... 5.34** 15,992,880
----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (Cost $74,447,794)........................... 74,447,794
----------
PRIVATE INVESTMENT FUNDS #, @ -- 2.01%
1 Advanced Technology Ventures V, LP ....................... 134,108
4 Brand Equity Ventures I, LP .............................. 824,267
1 MidAtlantic Venture Fund III, LP ......................... 1,667,665
1 Morgenthaler Venture Partners V, LP ...................... 400,000
3 Quad-C Partners V, LP .................................... 472,378
3 Sevin Rosen Fund VI, LP .................................. 375,522
1 Trinity Ventures VI, LP .................................. 187,500
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TOTAL PRIVATE INVESTMENT FUNDS
(Cost $3,859,836)......................................... 4,061,440
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PRIVATE COMPANIES #, @ -- 22.81%
Preferred and Common Stocks -- 22.81%
Computer Software -- 3.46%
1,151,315 +Constellar Corp., Series C ............................... 6,999,995
----------
Educational Services -- 3.95%
7,548 +Advantage Schools Inc., Series C ......................... 3,000,330
388,810 +Classroom Holdings, Inc. ................................. 4,999,988
----------
8,000,318
----------
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ------ --------
<S> <C> <C>
PRIVATE COMPANIES -- (Continued)
Preferred and Common Stocks -- (Continued)
Medical Devices -- 3.46%
522,388 +SurVivaLink Corp., Series B ............................ $ 6,999,999
------------
Semiconductors -- 6.14%
7,960,371 +PowerSmart Inc., Series A .............................. 7,960,371
4,850,000 +PowerSmart Inc., Common ................................ 277,129
736,975 +Softcom Microsystems Inc., Series B .................... 4,178,649
------------
12,416,149
Software Distribution Services -- 2.89% ------------
1,676,229 +Release Software Corp., Series D ....................... 5,850,039
------------
Telecommunications -- 2.91%
5,878 WNP Communications, Inc., Series A ...................... 5,877,557
29,806 WNP Communications, Inc., Common ........................ 298
------------
5,877,855
------------
TOTAL PRIVATE COMPANIES (Cost $46,144,355)............... 46,144,355
------------
INVESTMENT COMPANIES -- 2.02%
2,230,163 Dreyfus Treasury Cash Management Fund ................... 2,230,163
1,858,797 Fidelity Cash Portfolio, U.S. Treasury II ............... 1,858,797
------------
TOTAL INVESTMENT COMPANIES (Cost $4,088,960)............. 4,088,960
------------
TOTAL INVESTMENTS (Cost $201,750,317*).................................. 99.84% 201,945,731
OTHER ASSETS & LIABILITIES (NET) ....................................... 0.16 315,532
------- ------------
NET ASSETS ............................................................. 100.00% $202,261,263
======= ============
</TABLE>
* Aggregate cost for Federal tax and book purposes.
** Discount Rate
+ At October 31, 1998, the Fund owned 5% or more of the Company's outstanding
shares thereby making the Company an affiliate as defined by the Investment
Company Act of 1940. At October 31, 1998, these securities were valued at
the cost at which they were acquired during the year. There were no sales
of shares of any affiliates during the year. Total market value of
affiliated securities owned at October 31, 1998 was $40,266,500.
# Restricted as to public resale. Acquired between November 1, 1997 and
October 30, 1998. Total cost of restricted securities at October 31, 1998
aggregated $50,004,191. Total market value of restricted securities owned
at October 31, 1998 was $50,205,795 or 24.8% of net assets.
@ Non-Income Producing Security
See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Statement of Assets and Liabilities
October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $201,750,317) (Note 1) ................... $201,945,731
Cash ................................................................. 20,601
Interest receivable .................................................. 860,744
Prepaid insurance .................................................... 11,391
------------
Total Assets ....................................................... 202,838,467
LIABILITIES:
Management fees payable (Note 2) ..................................... 445,607
Directors' fees payable (Note 2) ..................................... 30,000
Administration fees payable (Note 2) ................................. 16,591
Accrued expenses and other payables .................................. 85,006
------------
Total Liabilities ................................................. 577,204
------------
NET ASSETS .............................................................. $202,261,263
============
NET ASSETS consist of:
Undistributed net investment income .................................. $ 6,748,595
Accumulated net realized loss on investments ......................... (592)
Net unrealized appreciation of investments ........................... 195,414
Par value ............................................................ 1,957
Paid-in capital in excess of par value ............................... 195,315,889
------------
Total Net Assets ........................................................ $202,261,263
============
Shares of Common Stock Outstanding ($0.01 par value, 200,000 authorized) 195,730
NET ASSET VALUE PER SHARE ............................................... $ 1,033.37
============
</TABLE>
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See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Statement of Operations
For the Year Ended October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income ..................................................... $ 9,813,746
-----------
EXPENSES:
Managing investment advisory fees (Note 2) .......................... 1,409,748
Legal fees .......................................................... 82,500
Insurance expense ................................................... 59,119
Administration fees (Note 2) ........................................ 58,000
Directors' fees and expenses (Note 2) ............................... 30,000
Audit fees .......................................................... 27,000
Amortization of organization expense (Note 4) ....................... 14,811
Printing fees ....................................................... 8,800
Miscellaneous expenses .............................................. 45,783
-----------
Total Expenses .................................................... 1,735,761
-----------
NET INVESTMENT INCOME .................................................. 8,077,985
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS): (Note 1)
Net realized loss on investments .................................... (592)
Net change in unrealized appreciation of investments 93,073
-----------
NET REALIZED AND UNREALIZED GAIN ....................................... 92,481
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................... $ 8,170,466
===========
</TABLE>
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See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
October 8,
Year Ended 1997* to
October 31, October 31,
1998 1997
--------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income ........................................... $ 8,077,985 $ 434,200
Net realized loss on investments ................................ (592) --
Net change in unrealized appreciation of investments ............ 93,073 102,341
------------ ------------
Net increase in net assets resulting from operations ......... 8,170,466 536,541
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................................... (1,763,590) --
CAPITAL SHARE TRANSACTIONS:
Subscriptions (40,218 and 155,511 shares, respectively) ......... 39,804,846 155,512,000
------------ ------------
Net increase in net assets ......................................... 46,211,722 156,048,541
NET ASSETS:
Beginning of period ............................................. 156,049,541 1,000
------------ ------------
End of period (including undistributed net investment income
of $6,748,595 and $434,200, respectively) ..................... $202,261,263 $156,049,541
============ ============
</TABLE>
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* Commencement of operations
See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Statement of Cash Flows
For the Year Ended October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Purchases of Investments ..................................... $ (50,004,190)
Net Decrease in Short-Term Investments ....................... 3,761,182
Investment Income ............................................ 9,465,989
Operating Expenses Paid ...................................... (1,243,699)
-------------
Net Cash Used for Investing and Operating Activities ......... (38,020,718)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid ........................................... (1,763,590)
Capital Share Transactions ................................... 39,804,846
-------------
Net Cash Provided by Financing Activities .................... 38,041,256
-------------
Net Increase in Cash ......................................... 20,538
Cash at Beginning of Year ....................................... 63
-------------
Cash at End of Year ............................................. $ 20,601
=============
Reconciliation of Net Investment Income to Net Cash Used
for Investing and Operating Activities:
Net Investment Income ........................................ $ 8,077,985
Purchases of Investments ..................................... (50,004,190)
Net Decrease in Short-Term Investments ....................... 3,761,182
Net Increase in Receivables Related to Operations ............ (359,148)
Net Decrease in Payables Related to Operations ............... (2,643,748)
Amortization of Organization Costs ........................... 14,811
Accretion/Amortization of Discounts and Premiums ............. 3,132,390
-------------
Net Cash Used for Investing and Operating Activities ......... $ (38,020,718)
=============
</TABLE>
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See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Financial Highlights -- Selected Per Share Data and Ratios
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For a fund share outstanding throughout each period
October 8,
Year Ended 1997* to
October 31, October 31,
1998 1997
--------------- -----------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .............................. $ 1,003.46 $ 1,000.00
---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income .......................................... 41.84 2.79
Net Realized and Unrealized Gain (Loss) on Investments ......... (1.78)# 0.67
---------- ----------
Total from Investment Operations ............................. 40.06 3.46
---------- ----------
DISTRIBUTIONS
Net Investment Income .......................................... (10.15) --
---------- ----------
NET ASSET VALUE, END OF PERIOD .................................... $ 1,033.37 $ 1,003.46
========== ==========
TOTAL NET ASSET VALUE RETURN+ ..................................... 4.04% 0.35 %
========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) .......................... $ 202,261 $ 156,050
Ratio of Net Operating Expenses to Average Net Assets .......... 0.87% 0.72%**
Ratio of Gross Operating Expenses to Average Net Assets++ ...... 0.87% 1.04%**
Ratio of Net Investment Income to Average Net Assets ........... 4.05% 4.23%**
Portfolio Turnover Rate ........................................ 0% 0%
</TABLE>
- --------------------------------------------------------------------------------
* Commencement of operations
** Annualized
+ Total investment return based on per share net asset value reflects the
effects of changes in net asset value based on the performance of the Fund
during the period, and assumes dividends and distributions, if any, were
reinvested. The Fund's shares were issued in a private placement and are
not traded, therefore market value total investment return is not
calculated. Total return for periods of less than one year are
unannualized.
++ Expense ratio before waiver of fees and reimbursement of expenses by
adviser.
# The amount shown for the year ended October 31, 1998 for a share outstanding
throughout that period does not accord with the aggregate net gains on
investments for that period because of the timing of sales and repurchases
of the portfolio shares in relation to fluctuating market value of the
investments in the Fund.
See Notes to Financial Statements
<PAGE>
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
Excelsior Private Equity Fund II, Inc. ("the Fund") was incorporated under
the laws of the State of Maryland on March 20, 1997 and is registered under the
Securities Act of 1933, as amended, as a non-diversified, closed-end management
investment company which has elected to be treated as a business development
company under the Investment Company Act of 1940, as amended.
The following is a summary of the Fund's significant accounting policies.
Such policies are in conformity with generally accepted accounting principles
for investment companies and are consistently followed in the preparation of
the financial statements. Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
these estimates.
(a) Portfolio valuation:
The Fund values portfolio securities quarterly and at other such times as
in the Board of Directors' view, as circumstances warrant. Investments in
securities that are traded on a recognized stock exchange or on the
national securities market are valued at the last sale price for such
securities on the valuation date. Short-term debt instruments with
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market value. Direct equity investments that are the same
class as a class of stock that is registered and publicly traded, but are
subject to regulatory holding periods or other restrictions, are valued
based upon the last sales price of the unrestricted stock on the securities
exchange on which such securities are primarily traded, less a liquidity
discount determined by the Investment Adviser. Direct equity investments
for which market quotations are not readily available are carried at fair
value as determined in good faith by the Investment Adviser after
considering certain pertinent factors, including the cost of the
investment, developments since the acquisition of the investment,
comparisons to similar publicly traded investments, subsequent purchases of
the same investment by other investors, the current financial position and
operating results of the issuer and such other factors as may be deemed
relevant. Investments in limited partnerships are carried at fair value as
determined by the Investment Adviser. In establishing the fair value of
investments in other partnerships, the Investment Adviser takes into
consideration information received from those partnerships, including their
financial statements and the fair value established by the general partner
of the investee partnership.
At October 31, 1998, market quotations were not readily available for
securities valued at $50,205,795. Such securities were valued by the
Investment Adviser, under the supervision of the Board of Directors.
Because of the inherent uncertainty of valuation, the estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
(b) Security transactions and investment income:
Security transactions are recorded on a trade date basis. Realized gains
and losses on investments sold are recorded on the basis of identified
cost. Interest income, adjusted for amortization of premiums and, when
appropriate, discounts on investments, is earned from settlement date and
is recorded on the accrual basis. Dividend income is recorded on the
ex-dividend date.
<PAGE>
(c) Repurchase agreements:
The Fund enters into agreements to purchase securities and to resell them
at a future date. It is the Fund's policy to take custody of securities
purchased and to ensure that the market value of the collateral including
accrued interest is sufficient to protect the Fund from losses incurred in
the event the counterparty does not repurchase the securities. If the
seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
(d) Federal income taxes:
It is the policy of the Fund to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code and
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least
annually. Any net realized capital gains, unless offset by any available
capital loss carryforward, are distributed to shareholders at least
annually. Dividends and distributions are determined in accordance with
Federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent. To the extent these differences are permanent, such
amounts are reclassified within the capital accounts based on their federal
tax basis treatment; temporary differences do not require reclassification.
At October 31, 1998, the tax basis of the Fund's investments for Federal
income tax purposes amounted to $201,750,317. The net unrealized
appreciation amounted to $195,414, which is comprised of gross unrealized
appreciation of $241,974 and aggregate gross unrealized depreciation of
$46,560.
2. Investment Advisory Fee, Administration Fee, and Related Party Transactions
Pursuant to an Investment Management Agreement ("Agreement"), United
States Trust Company of New York ("U.S. Trust") serves as the Managing
Investment Adviser to the Fund. Under the Agreement, for the services provided,
U.S. Trust is entitled to receive a fee, at the annual rate of 1.50% of the net
assets of the Fund, determined as of the end of each fiscal quarter, that are
invested or committed to be invested in Portfolio Companies or Private Funds
and equal to an annual rate of 0.50% of the net assets of the Fund, determined
as of the end of each fiscal quarter, that are invested in short-term
investments and are not committed to Portfolio Companies or Private Funds.
In addition to the management fee, the Fund has agreed to pay U.S. Trust
an incentive fee in an amount equal to 20% of the cumulative realized capital
gains (net of realized capital losses and unrealized net capital depreciation)
on investments other than Private Funds, less the aggregate amount of incentive
fee payments in prior years. If the amount of the incentive fee in any year is
a negative number, or cumulative net realized gains less net unrealized capital
depreciation at the end of any year is less than such amount calculated at the
end of the previous years U.S. Trust will be required to repay the Fund all or
a portion of the incentive fee previously paid.
Chase Global Funds Services Company ("CGFSC"), a corporate affiliate of
The Chase Manhattan Bank, (the "Administrator") provides administrative
services to the Fund. For the services provided to the Portfolio, the
Administrator is entitled to an annual fee of $58,000, which is paid quarterly.
<PAGE>
U.S. Trust has voluntarily agreed to waive or reimburse operating expenses
of the Fund, exclusive of management fees, to the extent they exceed 0.25% of
the Fund's net assets.
Each Director of the Fund receives an annual fee of $15,000, and is
reimbursed for expenses incurred for attending meetings. No person who is an
officer, director or employee of U.S. Trust, or of any parent or subsidiary
thereof, who serves as an officer, director or employee of the Fund receives
any compensation from the Fund.
3. Purchases and Sales of Securities
Purchases and sales of securities, excluding short-term investments, for
the Fund aggregated $50,004,190 and $0, respectively.
At October 31, 1998 the Fund had outstanding investment commitments
totaling $30,323,818.
4. Organization Costs
The Fund has borne all costs in connection with the initial organization
of the Fund. The Fund expensed all remaining organization costs, totaling
$14,811 as of October 31, 1998.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders 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., including the portfolio of investments,
as of October 31, 1998, the related statement of operations and statement of
cash flows for the year then ended, and the statement of changes in net assets
and financial highlights for the year then ended and for the period October 8,
1997 (commencement of operations) to October 31, 1997. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1998 by correspondence with the custodian and others. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Excelsior Private Equity Fund II, Inc. at October 31, 1998, the results of its
operations and its cash flows for the year then ended, and the changes in its
net assets and the financial highlights for the year then ended and for the
period October 8, 1997 (commencement of operations) to October 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
------------------------
New York, New York
December 16, 1998
- --------------------------------------------------------------------------------
Federal Income Tax Information (Unaudited)
The percentage of income earned from direct treasury obligations
was 16.78% for the Fund.
Y2K (Unaudited)
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be affected adversely if the
computer systems used by the Investment Adviser and the Fund's other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Investment Adviser and the Fund's other service providers have
informed the Fund that they are taking steps to address the Year 2000 Problem
with respect to the computer systems that they use. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund as a result of the Year 2000 Problem.
