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EXCELSIOR
PRIVATE EQUITY FUND II, INC.
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ANNUAL REPORT
October 31, 1997
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LETTER TO SHAREHOLDERS
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To Our Shareholders:
We are pleased to present the first annual report for the Excelsior Private
Equity Fund II, Inc. This annual report is designed to provide a financial
summary of the Fund's operations for the period from October 8, 1997, the date
of the first closing, to October 31, 1997, the fund's fiscal year end.
During this period, the Fund was invested in temporary investments in
accordance with the provisions in the prospectus. The Fund initially closed on
$155.5 million on October 8, 1997. On November 19, 1997, a second and final
closing took place bringing the Fund's total assets to $195.7 million. An
income dividend of the interest earned in the interim between the first and
second close was paid out on November 20, 1997.
Our current deal flow is strong, demonstrated by the 140 investment
opportunities we have reviewed to date. We are now seriously working on several
deals and hope to have our first direct investment closed by the end of January
1998.
Respectfully submitted,
/s/David Fann /s/Douglas Lindgren
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David Fann Douglas Lindgren
President and Chief Executive Officer Chief Investment Officer
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Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 1997
<TABLE>
<CAPTION>
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- --------------- ------------ -------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 76.62%
$7,700,000 Associates Corp., 12/03/97 ........................... 5.48% $ 7,700,000
7,700,000 Avco Financial Services, 2/26/98 ..................... 5.54 7,563,479
7,700,000 Bellsouth Telecommunications, Inc., 11/13/97 ......... 5.52 7,685,832
7,700,000 Chevron Corp., 12/01/97 .............................. 5.47 7,700,000
7,700,000 Coca-Cola Co., 11/24/97 .............................. 5.46 7,671,972
7,700,000 Ford Motor Credit Co., 11/26/97 ..................... 5.48 7,700,000
7,700,000 General Electric Capital Corp., 11/13/97 ............ 5.51 7,700,046
7,700,000 General Electric Capital Corp., 11/25/97 ............ 5.51 7,700,046
7,700,000 Goldman Sachs & Co., 11/13/97 ........................ 5.51 7,684,679
7,700,000 Hertz Corp., 11/05/97 .............................. 5.60 7,695,209
7,700,000 IBM Credit Corp., 11/13/97 ........................... 5.47 7,704,475
7,474,000 Metlife Funding Inc., 11/10/97 ..................... 5.48 7,462,623
7,700,000 Nestle Capital Corp., 11/05/97 ..................... 5.45 7,694,172
7,700,000 Sears & Roebuck Acceptance, 11/17/97 ............... 5.49 7,700,000
7,700,000 Societe Generale, 2/18/98 ........................... 5.50 7,697,690
4,500,000 Xerox Credit Corp., 1/20/98 ........................ 5.48 4,498,920
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TOTAL COMMERCIAL PAPER (Cost $119,468,767)............ 119,559,143
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CORPORATE BONDS -- 3.89%
6,197,000 Revlon Worldwide, Series B, Zero Coupon, 3/15/98
(Cost $6,064,356) .................................... 6,073,060
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U.S. GOVERNMENT AGENCY OBLIGATIONS -- 13.93%
1,230,000 Federal National Mortgage Association, 1/13/98 ...... 5.38 1,229,594
20,500,000 Federal National Mortgage Association, 1/15/98 ...... 5.52 20,502,665
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TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (Cost $21,728,998)........................ 21,732,259
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INVESTMENT COMPANIES -- 5.28%
3,203,780 Dreyfus Treasury Cash Management Fund ............... 3,203,780
5,042,000 Fidelity Cash Portfolio, U.S. Treasury II ............ 5,042,000
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TOTAL OTHER SHORT-TERM INVESTMENTS
(Cost $8,245,780) .................................... 8,245,780
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TOTAL INVESTMENTS (Cost $155,507,901*) .............................. 99.72% 155,610,242
OTHER ASSETS & LIABILITIES (NET) .................................... 0.28 439,299
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NET ASSETS ......................................................... 100.00% $156,049,541
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* Aggregate cost for Federal tax and book purposes.
See Notes to Financial Statements
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Excelsior Private Equity Fund II, Inc.
Statement of Assets and Liabilities
October 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $155,507,901) (Note 1) .................. $155,610,242
Cash ............................................................... 63
Interest receivable ................................................ 512,987
Unamortized organization costs (Note 3) .............................. 14,811
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Total Assets ...................................................... 156,138,103
LIABILITIES:
Management fees payable ............................................. 15,821
Directors' fees payable ............................................. 15,000
Administration fees payable .......................................... 3,655
Accrued expenses and other payables ................................. 54,086
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Total Liabilities ................................................ 88,562
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NET ASSETS ............................................................ $156,049,541
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NET ASSETS consist of:
Undistributed net investment income ................................. $ 434,200
Net unrealized appreciation of investments ........................... 102,341
Par value ............................................................ 1,555
Paid-in capital in excess of par value .............................. 155,511,445
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Total Net Assets ...................................................... $156,049,541
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Shares of Common Stock Outstanding ($0.01 par value, 200,000 authorized) 155,512
NET ASSET VALUE PER SHARE ............................................. $ 1,003.46
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</TABLE>
See Notes to Financial Statements
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Excelsior Private Equity Fund II, Inc.
Statement of Operations
For the Period October 8, 1997* to October 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income ................................................... $ 507,951
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EXPENSES:
Managing investment advisory fees (Note 2) ........................ 49,167
Audit fees ...................................................... 20,000
Directors' fees and expenses (Note 2) ........................... 15,000
Legal fees ...................................................... 10,000
Printing fees ................................................... 4,000
Administration fees ............................................. 3,655
Insurance expense ................................................ 2,369
Amortization of organization expense (Note 3) ..................... 189
Miscellaneous expenses .......................................... 2,717
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Total Expenses ................................................ 107,097
Expenses reimbursed by Managing Investment Adviser (Note 2) ...... (33,346)
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Net Expenses ................................................... 73,751
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NET INVESTMENT INCOME ................................................ 434,200
NET CHANGE IN UNREALIZED APPRECIATION OF INVESTMENTS (Note 1) ...... 102,341
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $ 536,541
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* Commencement of operations
See Notes to Financial Statements
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Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets
For the Period October 8, 1997* to October 31, 1997
<TABLE>
<S> <C>
OPERATIONS:
Net investment income ................................................... $ 434,200
Net change in unrealized appreciation of investments ..................... 102,341
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Net increase in net assets resulting from operations .................. 536,541
CAPITAL SHARE TRANSACTIONS:
Subscriptions (155,511 shares) .......................................... 155,512,000
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Net increase in net assets ................................................. 156,048,541
NET ASSETS:
Beginning of period (1 share) .......................................... 1,000
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End of period (including undistributed net investment income of $434,200) $156,049,541
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</TABLE>
* Commencement of operations
See Notes to Financial Statements
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Excelsior Private Equity Fund II, Inc.
Financial Highlights - Selected Per Share Data and Ratios
For the Period October 8, 1997* to October 31, 1997
<TABLE>
<S> <C>
For a fund share outstanding throughout the period
NET ASSET VALUE, BEGINNING OF PERIOD .............................. $ 1,000.00
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INCOME FROM INVESTMENT OPERATIONS
Net Investment Income .......................................... 2.79
Net Unrealized Gain on Investments .............................. 0.67
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Total from Investment Operations .............................. 3.46
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NET ASSET VALUE, END OF PERIOD .................................... $ 1,003.46
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TOTAL NET ASSET VALUE RETURN+ .................................... 0.35%
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RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) ........................... $ 156,050
Ratio of Net Operating Expenses to Average Net Assets ......... 0.72%**
Ratio of Gross Operating Expenses to Average Net Assets++ ...... 1.04%**
Ratio of Net Investment Income to Average Net Assets ............ 4.23%**
Portfolio Turnover Rate ....................................... 0%
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* 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.
See Notes to Financial Statements
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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. Securities and other assets for which market
quotations are not readily available are valued, pursuant to guidelines
adopted by the Investment Adviser, under the supervision of the Board of
Directors.
(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.
(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
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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, 1997, the tax basis of the Fund's investments for Federal
income tax purposes amounted to $155,507,901. The net unrealized
appreciation amounted to $102,341, which is comprised solely of gross
unrealized appreciation of $102,341.
2. Investment Advisory 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 year U.S. Trust will be required to repay the Fund all or a
portion of the incentive fee previously paid.
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. Organization Costs
The Fund has borne all costs in connection with the initial organization
of the Fund. All such costs are being amortized on a straight-line basis over a
period of five years from the date on which the Fund commenced operations.
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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, 1997, the related statement of operations, the statement of
changes in net assets and financial highlights for the period from 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 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 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, 1997 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 audit provides 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, 1997, the results of its
operations, the changes in its net assets and the financial highlights for the
period from October 8, 1997 to October 31, 1997 in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New York, New York
December 22, 1997
