<PAGE>
EXCELSIOR
Private Equity Fund II, Inc.
ANNUAL REPORT
October 31, 2000
<PAGE>
LETTER TO SHAREHOLDERS
--------------------------------------------------------------------------------
Dear Shareholders:
We are pleased to provide you with the 2000 Annual Report for the Excelsior
Private Equity Fund II, Inc. (the "Fund"). During this past year, the Fund
concluded making new portfolio investments.
Through October 31, 2000, the Fund has committed 91% and invested 83% of the
initial capital raised. The Fund's portfolio construction was completed in its
third year of existence. The Fund has made a total of 20 direct investments and
invested in 13 private investment funds. With respect to direct investments,
two companies have been sold and two have been taken public. In addition, the
Fund has received meaningful distributions from several private investment
funds.
Our investment approach has always been to create a diversified portfolio.
Our direct investment portfolio is diversified, on a cost basis, as follows:
<TABLE>
<S> <C>
Information Technology 32%
Information Services 26%
Life Sciences 16%
Communications 13%
Education 11%
Other 2%
</TABLE>
With respect to performance, we measure the Fund's return in two ways. To be
consistent with the manner in which nearly all other venture capital and
private equity funds measure performance, we use the internal rate of return
("IRR") metric. The IRR measures the performance of the Fund's direct and
private fund investments only, excluding the cash portion of the portfolio
invested in money market instruments. From inception through the fiscal year
ended October 31, 2000, the Fund's IRR on its capital at risk in private equity
was 53.8%. We also provide the Fund's total return, including the cash portion
of the portfolio and including an imputed reinvestment rate consistent with the
Securities and Exchange Commission's ("SEC") performance measurement
methodology. Calculated this way, the Fund achieved a total return of 35.9% for
the fiscal year ended October 31, 2000, and has generated a 17.3% annualized
total return since its commencement of operations on October 8, 1997. To date,
the Fund has returned approximately 37% of the investors' original investment.
Direct Investments
Investments Sold
. 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 Local Area Network traffic moves on to a high-speed
broadband Internet backbone. In August 1999, Softcom was sold to Intel for
cash. The Fund realized a 3.7x return on its $4.2 million investment.
. WNP Communications, Inc., Reston, VA, acquired broadband spectrum covering
30 of the top 50 markets in the United States in the Local Multipoint
Distribution Services auction conducted by the Federal Communications
Commission in 1998. In May 1999, the company was acquired by NextLink, a
leading wireless communication services provider, for cash and stock. The
Fund has sold all of its stock of NextLink and realized a 2.24x return on
its $5.9 million investment.
<PAGE>
Investments Held -- Public
. Curon Medical, Inc. (NASDAQ: CURN) (formerly known as Conway-Stuart
Medical, Inc.), Sunnyvale, CA, develops and markets medical devices for the
treatment of gastrointestinal diseases using radio frequency delivered
though a catheter. Curon completed its initial public offering in September
2000. The Fund invested $6 million in Curon at an average cost of $2.63 per
share and currently holds 2.3 million shares. As of October 31, 2000, Curon
was trading at approximately $11 3/8 per share.
. LifeMinders, Inc. (NASDAQ: LFMN), Herndon, VA, is an online direct
marketing company that provides personalized information and advertisements
via email to a community of members. Email messages contain helpful
reminders and tips that enable its members to better organize and manage
their lives. In November 1999, the company completed its initial public
offering. The Fund has invested $11.5 million in LifeMinders at an average
cost of $2.70 per share and the company's stock, as of October 31, 2000,
was trading at $11 5/8 per share. The Fund has sold 735,000 shares of
LifeMinders and has realized $26 million in proceeds.
Investments Held -- Private
. 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 capitalization rates
generally consistent with those received by other schools in the district.
. BPA Systems, Inc., Austin, TX, develops fulfillment software that help
Internet-enabled companies rapidly take advantage of e-commerce
opportunities. The BPA products suite allows large global companies as well
as Internet startups to fully integrate their existing supply chains with
their e-commerce web sites.
. Captura Software, Inc., Bothell, WA, develops and provides expense
management software and service solutions for large companies. The
company's products significantly increase the efficiency and lower the cost
of expense reports by providing a web-based software application that
automates much of the process. On October 12, 2000, Captura filed an S-1
registration statement with the SEC for up to $70 million for its initial
public offering of its common stock. The lead underwriter for the offering
will be Banc of America Securities, LLC. The other managing underwriters
include U.S. Bancorp Piper Jaffray, Wit SoundView and Pacific Crest
Securities.
. Classroom Connect, Inc., Los Angeles, CA, is a provider of Internet-based
educational products for students in the kindergarten to eighth grade
market. The company's product and service offerings include proprietary
instruction guides, teaching plans, seminars and unique Internet content.
The company is targeting teachers and school districts wishing to
incorporate the Internet into the classroom.
<PAGE>
. ePod Corp., New York, NY, provides distributed e-commerce, content
syndication and rich media advertising services to manufacturers, retailers,
web publishers and content providers in the entertainment, retail and
advertising industries. The ePod.com commerce network uses a common
merchandising infrastructure whereby companies can promote and sell products
by packaging and distributing content and merchandise through commerce-
enabled showcases called ePods.
. firstsource Corp., Santa Ana, CA, is the largest full service provider of e-
procurement infrastructure solutions for both buyers and sellers.
firstsource Corp.'s proprietary technology platform, inpowr FSP, has been
developed over the past seven years with over seven million dollars
invested, and has handled over one million procurement transactions. Each
transaction is managed end-to-end by firstsource, including determination of
inventory availability, order processing, customer services, fulfillment,
collections and returns management.
. KillerBiz, Inc., Santa Clara, CA, is an online business-to-business
marketplace and software solution connecting small businesses to suppliers
of goods and services. The company is dedicated to reducing the time and
costs associated with services procurement while providing sellers with a
cost effective means to access and respond to qualified sales leads. The
KillerBiz web site offers a business-to-business marketplace that leverages
both Extensive Mark-up Language and patent-pending Intelligent Trained Agent
technology.
. MarketFirst Software, Inc., Mountain View, CA, develops and markets hosted
e-marketing software and services targeting middle-market corporations. The
company's solution is focused on enabling and managing interactive marketing
campaigns through the Internet. The company's customers are motivated by the
prospect of increasing customer revenue, improving customer relationships
and reducing costs by automating key marketing functions with the
MarketFirst solution.
. MySeasons.com, Inc., New York, NY, is a business-to-consumer and business-
to-business Internet commerce site aimed at selling gardening and related
horticultural products, as well as providing associated content to the
gardening community.
. PowerSmart, Inc., Shelton, CT, is a provider of "smart" battery management
products designed to maximize battery run-times and safety in laptop
computers, cellular telephones and camcorders as well as a variety of hand-
held electronic devices. PowerSmart recently introduced two new lines of
Application Specific Integrated Circuits and electronic modules that offer
performance and flexibility at competitive prices. PowerSmart was formed as
a spin-off of technology and related assets from Duracell.
. Protogene Laboratories, Inc., Palo Alto, CA, is a developer and manufacturer
of DNA gene chip technology used in molecular biology and genetic research.
The company's products allow for flexible, short-run testing of genetic
expression that has broad applications in genetic research and
pharmaceutical development.
. ReleaseNow, Inc., Menlo Park, CA, is an outsourced provider of e-commerce
services for vendors and resellers of software and other digital goods.
ReleaseNow provides software publishers, software resellers and content-
driven web sites with technology and services to establish an Internet-based
sales and distribution channel.
<PAGE>
. SurVivaLink Corporation, Minnetonka, MN, designs, develops, manufactures,
and markets automated external defibrillators (AEDs), which are portable,
emergency medical devices that deliver electrical shocks to resuscitate
victims of cardiac arrests. SurVivaLink's AEDs are small, lightweight and
easy to use, making them suitable for law enforcement personnel,
firefighters and paramedics.
. Zeus Wireless, Inc., Columbia, MD, builds and markets long-range frequency
hopping radios for commercial and industrial facilities. The company
utilizes radio frequency technology as a substitute for wire with comparable
range, reliability and security at a lower price while offering the
flexibility associated with wireless solutions.
Investments Written-Off
. Constellar Corporation, Redwood Shores, CA, a provider of enterprise
application integration software and services to large organizations in
North America, Europe and Australia, was sold in an asset purchase
transaction to the Data Mirror Group. The purchase price was $15 million,
which was used to satisfy the company's debts. Although the transaction
calls for certain contingency payments to shareholders, the investment has
been fully written-off.
. Managemark, Inc. (formerly known as On the Go Software, Inc.), Sunnyvale,
CA, is an Internet application software company focused on developing
finance and administration software and services for small and middle-market
firms. The company's bank foreclosed on its credit line when Managemark
failed to raise additional capital. Consequently, it is likely that the Fund
will not receive any proceeds from this investment and will realize a loss
of approximately $5.5 million.
Investments in Third-Party Investment Funds
. Advanced Technology Ventures V, LP ("ATV V") is an early-stage focused fund
targeting information technology and health care markets. The Fund has
received distributions of Vignette common stock from ATV V.
. Brand Equity Ventures I, LP ("BEV") is focused on investing broadly across
the consumer sector, particularly in branded opportunities within e-
commerce, retailing, and direct response markets. The Fund has received
stock distributions of Cyberian Outpost and Alloy Online from BEV.
. Brentwood Associates III, LP ("BA III") is focused on middle-market buyouts
and consolidations. BA III's strategy is to identify industries with
consolidation characteristics, develop a strategy for implementation and
recruit management to execute that strategy.
. Broadview Capital Partners, LP is focused on buyouts, recapitalizations and
growth financings within the technology sector.
. Commonwealth Ventures II, LP ("CV II") invests in early to later-stage
information technology companies in the New England region. CV II maintains
a particular focus on communications technology, Internet software and
services and e-commerce companies. The Fund has received a distribution of
Cisco Systems common stock from CV II.
<PAGE>
. Communications Ventures III LP ("CV III") targets early-stage companies
exclusively in the communications sector. In October, two of CV III's
portfolio companies, Sitesmith and Entera, were acquired by Metromedia Fiber
Network and CacheFlow, respectively.
. Freidman, Fleischer & Lowe, LP is a fund focused exclusively on
participation in middle-market buyouts.
. Mayfield X, LP invests in early-stage information technology and healthcare
companies, primarily located in Silicon Valley. To date, Mayfield X has
distributed shares of Aether common stock to the Fund.
. Mid-Atlantic Venture Fund III, LP ("MAVF III") invests in early and
expansion-stage companies throughout the Mid-Atlantic region of the United
States. The principals of MAVF III have significant investment experience
and, over the years, have established a presence within the investment
community in the Mid-Atlantic region.
. Morgenthaler Venture Partners V, LP ("MVP V") is primarily an early-stage
venture fund, investing largely in information technology and healthcare
companies but also invests in buyouts of basic businesses. The Fund has
received distributions of CheckFree Holdings common stock from MVP V.
. Quad-C Partners V, LP is focused on taking control positions in leveraged
acquisitions and recapitalizations of middle-market companies.
. Sevin Rosen Fund VI, LP ("Sevin Rosen") invests in early-stage technology
companies, focusing specifically on companies in communications and
eBusiness infrastructure and solutions, as well as those companies with
Internet-enabled business models. From Sevin Rosen, the Fund has received
stock distributions of Vitesse Semiconductor, Cisco Systems and Broadcom.
. Trinity Ventures VI, LP ("Trinity") is an early to later-stage fund, which
invests in the software, communications and electronic commerce sectors. The
Fund received distributions of Sciquest shares and cash from Trinity.
We are still early in the harvest cycle of the Fund. Despite the market
turbulence over the past few months, we remain optimistic regarding the Fund's
prospects and remain committed to doing everything in our power to drive
shareholder value.
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, 2000
<TABLE>
<CAPTION>
Principal Acquisition Coupon Value
Amount/Shares Date## Rate/Yield (Note 1)
------------- ----------- ---------- -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 8.38%
$21,600,000 Fannie Mae, 11/02/00 (Cost
$21,596,142)............... 6.43%* $21,596,142
-----------
PRIVATE INVESTMENT FUNDS #, @ -- 31.27%
Advanced Technology
Ventures V, LP............. 3,994,945
Brand Equity Ventures I,
LP......................... 2,735,190
Brentwood Associates III,
LP......................... 1,771,671
Broadview Capital Partners,
LP......................... 2,115,080
Commonwealth Capital
Ventures II, LP............ 3,154,479
Communications Ventures
III, LP.................... 23,066,790
Friedman, Fleischer & Lowe,
LLC, LP.................... 1,170,272
Mayfield X, LP............. 6,555,280
Mid-Atlantic Venture Fund
III, LP.................... 6,965,132
Morgenthaler Venture
Partners V, LP............. 15,082,031
Quad-C Partners V, LP...... 3,548,917
Sevin Rosen Fund VI, LP.... 5,681,909
Trinity Ventures VI, LP.... 4,746,561
-----------
TOTAL PRIVATE INVESTMENT
FUNDS (Cost $42,376,908)... 80,588,257
-----------
PRIVATE COMPANIES #, +, @ -- 40.33%
Common and Preferred Stocks -- 38.58%
Biotechnology -- 2.20%
7,100,000 Protogene Laboratories,
Inc., Series B............. 12/99-01/00 5,680,000
-----------
Computer Software -- 0.00%
1,151,315 Constellar Corp., Series
C.......................... 04/98 --
-----------
Educational Services -- 8.09%
7,548 Advantage Schools, Inc.,
Series C................... 06/98 8,722,510
79,531 Advantage Schools, Inc.,
Series D................... 03/99 1,010,970
111,074 Advantage Schools, Inc.,
Series E................... 09/00 1,283,854
38,502 Classroom Connect, Inc.,
Cumulative................. 09/98 3,850,200
361,822 Classroom Connect, Inc.,
Series A................... 09/98 4,121,153
162,297 Classroom Connect, Inc.,
Series B................... 06/99 1,848,563
-----------
20,837,250
-----------
Internet Services -- Business -- 16.29%
1,428,572 BPA Systems Inc., Series
A.......................... 06/00 5,000,000
695,652 Captura Software, Inc.,
Series D................... 02/99 6,462,608
86,114 Captura Software, Inc.,
Series E................... 02/00 799,999
913,597 ePod Corp., Series B-1..... 12/99 2,151,521
467,174 ePod Corp., Series B-2..... 05/00-08/00 1,100,195
2,388,345 firstsource Corp., Series
A.......................... 02/00 10,000,000
7,113,967 Managemark, Inc., Series
B.......................... 06/99 --
4,694,407 Marketfirst Software, Inc.,
Series B................... 09/99 4,999,570
2,000,000 MySeasons.com, Inc., Series
A.......................... 02/00-03/00 2,000,000
1,676,229 ReleaseNow, Inc., Series
D.......................... 06/98 8,381,145
115,000 ReleaseNow, Inc., Series
E.......................... 05/99 575,000
100,000 ReleaseNow, Inc., Series
F.......................... 12/99 500,000
-----------
41,970,038
-----------
Medical Devices -- 2.71%
522,388 SurVivaLink Corp., Series
B.......................... 08/98 6,999,994
-----------
Semiconductors -- 7.35%
4,850,000 PowerSmart, Inc., Common... 01/98 8,810,510
7,960,371 PowerSmart, Inc., Series
A.......................... 01/98 7,960,371
530,786 PowerSmart, Inc., Series
B.......................... 08/99 1,464,863
252,780 PowerSmart, Inc., Series
D.......................... 10/00 697,622
-----------
18,933,366
-----------
</TABLE>
See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2000--(continued)
<TABLE>
<CAPTION>
Principal Acquisition Coupon Value
Amount/Shares Date## Rate/Yield (Note 1)
------------- ----------- ---------- ------------
<C> <S> <C> <C> <C>
PRIVATE COMPANIES #, +, @ -- (continued)
Common and Preferred Stocks -- (continued)
Wireless Radio Equipment -- 1.94%
3,033,981 Zeus Wireless, Inc.,
Series B................. 12/99 $ 5,000,001
------------
Promissory Notes -- 1.37%
Internet Services--Business -- 1.14%
$750,000 Killerbiz, Inc........... 12/99-09/00 8.00% 750,000
$500,000 Managemark, Inc.......... 05/00 10.00 --
$2,200,000 Marketfirst Software,
Inc...................... 07/00-10/00 9.00 2,200,000
------------
2,950,000
------------
Medical Devices -- 0.23%
$585,000 SurVivaLink Corp......... 12/99 12.00 585,000
------------
Warrants -- 0.38%
Educational Services -- 0.14%
27,760 Advantage Schools, Inc... 02/99 320,518
46,219 Advantage Schools, Inc.,
Series D................. 03/99 46,293
------------
366,811
------------
Internet Services -- Business -- 0.00%
148,148 MySeasons.com, Inc.,
Series A................. --
------------
Software Distribution Services -- 0.24%
173,913 Captura Software, Inc.,
Series D................. 02/99 615,652
21,529 Captura Software, Inc.,
Series E................. 02/00 --
------------
615,652
------------
TOTAL PRIVATE COMPANIES
(Cost $92,071,348)....... 103,938,112
------------
PUBLIC COMPANIES #, +, @ -- 20.69%
Common Stock -- 20.28%
Medical Devices -- 7.55%
2,280,000 Curon Medical, Inc....... 08/99 19,451,250
------------
Internet Services -- Consumer -- 12.73%
3,526,685 Life Minders, Inc........ 02/99-09/99 32,798,171
------------
Options -- 0.29%
Medical Devices -- 0.29%
101,088 Curon Medical, Inc....... 12/99 738,264
------------
Warrants -- 0.12%
Medical Devices -- 0.12%
76,950 Curon Medical, Inc....... 05/00 318,972
------------
TOTAL PUBLIC COMPANIES
(Cost $16,602,415)....... 53,306,657
------------
INVESTMENT COMPANIES -- 4.83%
3,657,768 Dreyfus Treasury Cash
Management Fund.......... 3,657,768
46,400 Dreyfus Government Cash
Management Fund.......... 46,400
8,750,189 Fidelity Cash Portfolio,
U.S. Treasury II......... 8,750,189
------------
TOTAL INVESTMENT
COMPANIES (Cost
$12,454,357) 12,454,357
------------
TOTAL INVESTMENTS (Cost $185,101,170**)............. 105.50% 271,883,525
OTHER ASSETS & LIABILITIES (NET).................... (5.50) (14,178,319)
------ ------------
NET ASSETS.......................................... 100.00% $257,705,206
====== ============
</TABLE>
--------
*Discount Rate
** Aggregate cost for Federal tax and book purposes.
+ At October 31, 2000, 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. Total market value of affiliated securities owned at
October 31, 2000 was $157,244,769.
# Restricted as to public resale. Acquired between January 1, 1998 and October
31, 2000. Total cost of restricted securities at October 31, 2000 aggregated
$151,050,671. Total market value of restricted securities owned at October
31, 2000 was $237,833,026 or 92.29% of net assets.
## Required disclosure for restricted securities only.
@ Non-Income Producing Security.
See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Statement of Assets and Liabilities
October 31, 2000
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $185,101,170) (Note 1)............ $271,883,525
Receivable for investments sold............................... 2,022,282
Interest receivable........................................... 103,053
Cash.......................................................... 2,174
Other Assets.................................................. 159,126
------------
Total Assets.................................................. 274,170,160
LIABILITIES:
Incentive fee payable (Note 2)................................ 5,059,389
Deferred incentive fee payable (Note 2)....................... 9,714,201
Management fees payable (Note 2).............................. 928,875
Payable for investments purchased............................. 574,999
Directors' fees payable (Note 2).............................. 66,489
Administration fees payable (Note 2).......................... 14,499
Accrued expenses and other payables........................... 106,502
------------
Total Liabilities............................................. 16,464,954
------------
NET ASSETS..................................................... $257,705,206
============
NET ASSETS consist of:
Undistributed net investment income........................... $ 1,304,582
Accumulated net realized gain on investments.................. 4,174
Net unrealized appreciation of investments.................... 86,782,355
Allowance for management incentive fee........................ (19,688,071)
Par value..................................................... 1,957
Paid-in capital in excess of par value........................ 189,300,209
------------
Total Net Assets............................................... $257,705,206
============
Shares of Common Stock Outstanding ($0.01 par value, 200,000
authorized).................................................... 195,730
NET ASSET VALUE PER SHARE...................................... $ 1,316.64
============
</TABLE>
See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Statement of Operations
For the Year Ended October 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income................................................ $ 4,202,089
-----------
EXPENSES:
Managing investment advisory fees (Note 2)..................... 4,196,214
Legal fees..................................................... 128,390
Directors' fees and expenses (Note 2).......................... 66,689
Administration fees (Note 2)................................... 58,000
Audit fees..................................................... 44,200
Printing fees.................................................. 8,570
Miscellaneous expenses......................................... 161,623
-----------
Total Expenses................................................. 4,663,686
-----------
NET INVESTMENT LOSS............................................. (461,597)
-----------
NET REALIZED AND UNREALIZED GAIN: (Note 1)
Net realized gain on investments............................... 31,080,775
Net change in unrealized appreciation of investments........... 54,326,850
-----------
NET REALIZED AND UNREALIZED GAIN................................ 85,407,625
-----------
Net change in allowance for management incentive fee............ (8,936,514)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............ $76,009,514
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
2000 1999
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss)................... $ (461,597) $ 4,168,296
Net realized gain on investments............... 31,080,775 24,838,281
Net change in unrealized appreciation of
investments.................................... 54,326,850 32,260,091
Net change in allowance for management
incentive fee.................................. (8,936,514) (10,751,557)
------------ ------------
Net increase in net assets resulting from
operations..................................... 76,009,514 50,515,111
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................... -- (7,669,460)
Net realized gain.............................. (52,919,404) --
Paid-in capital................................ (10,491,818) --
------------ ------------
Total Distributions............................ (63,411,222) (7,669,460)
------------ ------------
Net increase in net assets...................... 12,598,292 42,845,651
NET ASSETS:
Beginning of period............................ 245,106,914 202,261,263
------------ ------------
End of period (including undistributed net
investment income of $1,304,582 and $5,259,727,
respectively).................................. $257,705,206 $245,106,914
============ ============
</TABLE>
See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Statement of Cash Flows
For the Year Ended October 31, 2000
<TABLE>
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments........................... $ 32,345,524
Purchases of Investments..................................... (59,491,934)
Net Decrease in Short-Term Investments....................... 95,513,291
Investment Income............................................ 4,340,858
Management Incentive Fee Paid................................ (4,914,480)
Operating Expenses Paid...................................... (4,379,999)
------------
Net Cash Provided for Investing and Operating Activities..... 63,413,260
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid........................................... (63,411,222)
------------
Net Cash Used by Financing Activities........................ (63,411,222)
------------
Net Increase in Cash......................................... 2,038
Cash at Beginning of Year..................................... 136
------------
Cash at End of Year........................................... $ 2,174
============
Reconciliation of Net Investment Loss to Net Cash Provided for
Investing and Operating Activities:
Net Investment Loss.......................................... $ (461,597)
Proceeds from Sales of Investments........................... 32,345,524
Purchases of Investments..................................... (59,491,934)
Net Decrease in Short-Term Investments....................... 95,513,291
Net Decrease in Receivables Related to Operations............ 132,055
Net Decrease in Payables Related to Operations............... (6,868,574)
Accretion/Amortization of Discounts and Premiums............. 2,244,495
------------
Net Cash Provided for Investing and Operating Activities..... $ 63,413,260
============
</TABLE>
See Notes to Financial Statements
<PAGE>
Excelsior Private Equity Fund II, Inc.
Financial Highlights -- Selected Per Share Data and Ratios
For a Fund share outstanding throughout each period
<TABLE>
<CAPTION>
October 8,
Year Ended October 31, 1997* to
-------------------------------- October 31,
2000 1999 1998 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $1,252.27 $1,033.37 $1,003.46 $1,000.00
--------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss)...................... (2.36) 21.29 41.84 2.79
Net Realized and Unrealized
Gain (Loss) on Investments.. 436.36 291.72 (1.78) 0.67
Net Change in Allowance for
Management Incentive fee.... (45.66) (54.93) -- --
--------- --------- --------- ---------
Total From Investment
Operations.................. 388.34 258.08 40.06 3.46
--------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income....... -- (39.18) (10.15) --
Net Realized Gains.......... (270.37) -- -- --
Paid-In Capital............. (53.60) -- -- --
--------- --------- --------- ---------
Total Distributions......... (323.97) (39.18) (10.15) --
--------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD....................... $1,316.64 $1,252.27 $1,033.37 $1,003.46
========= ========= ========= =========
TOTAL NET ASSET VALUE
RETURN+...................... 35.89 % 25.94% 4.04% 0.35%
========= ========= ========= =========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(Thousands)................. $ 257,705 $ 245,107 $ 202,261 $ 156,050
Ratio of Net Operating
Expenses to Average Net
Assets...................... 1.55 % 1.26% 0.87% 0.72%**
Ratio of Gross Operating
Expenses to Average Net
Assets++.................... 1.55 % 1.26% 0.87% 1.04%**
Ratio of Net Investment
Income (Loss) to Average Net
Assets...................... (0.15)% 1.86% 4.05% 4.23%**
Portfolio Turnover Rate..... 14 % 40% 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.
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 a non-diversified,
closed-end management investment company that has elected to be treated as a
business development company under the Investment Company Act of 1940, as
amended.
The following is a summary of the 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, 2000, market quotations were not readily available for
securities valued at $237,833,026. 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 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.
During the current year, permanent differences, primarily due to net
operating losses, resulted in decreases in undistributed net investment
income and accumulated net realized gain on investments and a corresponding
increase in paid-in capital. The reclassification had no effect on net
assets.
At October 31, 2000, the tax basis of the Fund's investments for Federal
income tax purposes amounted to $185,101,170. The net unrealized
appreciation amounted to $86,782,355, which is comprised of gross
unrealized appreciation of $99,831,901 and aggregate gross unrealized
depreciation of $13,049,546.
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 year, U.S. Trust will be required
to repay the Fund all or a portion of the incentive fee previously paid.
U.S. Trust is a state-chartered bank and trust company and a member bank of
the Federal Reserve System and is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company. U.S. Trust Corporation is a
wholly-owned subsidiary of the Charles Schwab Corporation.
<PAGE>
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 Fund, the Administrator is
entitled to an annual fee of $58,000, which is paid quarterly.
U.S. Trust has voluntarily agreed to waive or reimburse other operating
expenses of the Fund, exclusive of management fees, to the extent they exceed
0.25% of the Fund's net assets. No such reimbursement was required during the
year ended October 31, 2000.
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
The Fund's purchases and sales of securities, excluding short-term
investments, for the year ended October 31, 2000, aggregated $60,066,932 and
$34,368,859, respectively.
At October 31, 2000, the Fund had outstanding investment commitments
totaling $15,761,052.
4. Transactions with Affiliated Companies
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. The Fund did not receive dividend or
interest income from affiliated companies during the period. Transactions with
companies, which are or were affiliates are as follows:
Summary of Transactions with Affiliated Companies
<TABLE>
<CAPTION>
Sales Realized Value
Affiliate Purchases Proceeds Gains (Note 1)
--------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Advantage Schools, Inc. ..... $ 1,283,579 -- -- $ 11,384,145
BPA Systems, Inc. ........... 5,000,000 -- -- 5,000,000
Captura Software, Inc. ...... 799,999 -- -- 7,878,257
Curon Medical, Inc. ......... 124,144 -- -- 20,508,486
ePod Corp. .................. 2,099,998 -- -- 3,251,716
firstsource Corp. ........... 10,000,000 -- -- 10,000,000
Killerbiz, Inc. ............. 750,000 -- -- 750,000
Managemark, Inc. ............ 500,000 -- -- --
Marketfirst Software, Inc. .. 2,200,000 -- -- 7,199,570
MySeasons.com, Inc........... 2,000,000 -- -- 2,000,000
PowerSmart, Inc. ............ 689,343 -- -- 18,933,366
Protogene Laboratories,
Inc. ....................... 5,680,000 -- -- 5,680,000
ReleaseNow, Inc. ............ 500,000 -- -- 9,456,145
SurVivaLink Corp. ........... 585,000 -- -- 7,584,994
Zeus Wireless, Inc. ......... 5,000,001 -- -- 5,000,001
Life Minders, Inc. .......... -- $26,106,023 $25,208,441 32,798,171
----------- ----------- ----------- ------------
$37,212,064 $26,106,023 $25,208,441 $147,424,851
=========== =========== =========== ============
</TABLE>
<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. (the "Fund"), including the portfolio of
investments, as of October 31, 2000, the related statement of operations and
statement of cash flows for the year then ended, the statement of changes in
net assets for each of the two years then ended and the financial highlights
for each of the indicated periods. 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 auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of October 31, 2000 by correspondence with
the custodian and brokers or other appropriate auditing procedures where
replies from brokers were not received. 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, 2000, the results of its
operations and its cash flows for the year then ended, the changes in net
assets for each of the two years then ended and the financial highlights for
each of the indicated periods in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
December 15, 2000
<PAGE>
Federal Income Tax Information (Unaudited)
In order to meet certain requirements of the Internal Revenue Code we are
advising you that of the $63,411,222 distributions paid by the fund during the
fiscal year October 31, 2000, $47,915,850 is from long-term capital gains,
5,003,554 is from short-term capital gains, and $10,491,818 is from paid-in
capital.
The percentage of income earned from direct treasury obligations was 0.00%
for the Fund.
Shareholders should not use the above information to prepare their tax
returns. The information necessary to complete your income tax returns will be
included with your Form 1099 DIV, which will be sent to you separately in
January 2001.
<PAGE>
OTHER BUSINESS (UNAUDITED)
The Annual Meeting of Shareholders of the Company was held at the offices of
United States Trust Company 114 West 47th Street, New York, New York 10036 on
July 18, 2000, at 10:00 a.m. (New York time) (the "Meeting"). Of the 195,730
shares outstanding as of April 24, 2000, the record date for the Meeting,
127,623 were present or represented by proxy at the Meeting. The shareholders
of the Company approved the following matters: (i) to elect each of Mr.
Bernstein, Mr. Hover, Mr. Murphy and Mr. Imbimbo as directors of the Company,
(ii) to approve or disapprove a new investment advisory agreement among the
Company, United States Trust Company of New York and U.S. Trust Company, (iii)
to approve and ratify or disapprove and reject the payments previously made to
United States Trust Company of New York and U.S. Trust Company pursuant to the
investment advisory agreement and the Board of Directors' determinations with
respect thereto, and (iv) to ratify or reject the selection of Ernst & Young
LLP as the Company's independent auditors for the fiscal year ending October
31, 2000. The results of the voting for each of these proposals were as
follows:
1. Election of Directors:
<TABLE>
<CAPTION>
For Withheld
-------------------------------------------------------------------------------
<S> <C> <C>
John C. Hover II.............................................. 126,409 1,214
Gene M. Bernstein............................................. 126,384 1,239
Stephen V. Murphy............................................. 126,309 1,314
Victor F. Imbimbo, Jr......................................... 126,409 1,214
</TABLE>
2. To approve the new investment advisory agreement:
For: 125,541
Against: 1,004
Abstain: 1,078
3. To approve and ratify payments previously made to United States Trust
Company of New York and U.S. Trust Company, etc.:
For: 106,284
Against: 2,305
Abstain: 19,034
4. To ratify Ernst & Young LLP as independent auditors for the fiscal year
ending October 31, 2000:
For: 126,210
Against: 880
Abstain: 533