As filed with the Securities and Exchange Commission on February 23, 2000
Registration No. 333-
Registration No. 811-
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-2
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|X| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|_| Pre-Effective Amendment No.
|_| Post-Effective Amendment No.
and/or
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
|_| Amendment No.
EXCELSIOR PRIVATE EQUITY FUND III, LLC
(Exact name of registrant as specified in charter)
114 WEST 47TH STREET, NEW YORK, NEW YORK 10036-1532
(Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 852-3125
DAVID I. FANN
DOUGLAS A. LINDGREN
EXCELSIOR PRIVATE EQUITY FUND III, LLC
114 WEST 47TH STREET, NEW YORK, NEW YORK 10036-1532
(Name and Address of Agents for Service)
COPIES TO:
<TABLE>
<S> <C>
THOMAS A. DECAPO, ESQ. RONALD A. SCHWARTZ, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP UNITED STATES TRUST COMPANY OF NEW YORK
ONE BEACON STREET 114 WEST 47TH STREET
BOSTON, MA 02108-3194 NEW YORK, NEW YORK 10036-1532
PHONE NO.: (617) 573-4814 PHONE NO.: (212) 852-1315
FAX NO.: (617) 573-4822 FAX NO.: (212) 852-1310
</TABLE>
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection with a
dividend reinvestment plan, check the following box.......................|X|
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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=======================================================================================================================
Proposed Proposed
Amount Maximum Amount of
Title of Securities being Offering Price Per Maximum Aggregate Registration
being Registered Registered Unit Offering Price Fee
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Membership Interests
(without par value) 500,000 units $1,000 $500,000,000 $132,000
=======================================================================================================================
</TABLE>
* Estimated solely for the purpose of calculating the registration fee.
The registrant hereby amends this Registration Statement under the
Securities Act of 1933 on such date or dates as may be necessary to delay
its effective date until the registrant shall file a further amendment
which specifically states that this Registration Statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of
1933 or until this Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may
determine.
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CROSS REFERENCE SHEET
PART A
ITEM NUMBER LOCATION IN PROSPECTUS
- ----------- -----------------------
<S> <C> <C>
Item 1. Outside Front Cover............................ Outside Front Cover
Item 2. Cover Pages; Other Offering Information........ Inside Front and Outside Back Cover Page
Item 3. Fee Table and Synopsis......................... Fee Table; Prospectus Summary
Item 4. Financial Highlights........................... Not applicable
Item 5. Plan Of Distribution........................... The Offering; Selling Arrangements
Item 6. Selling Shareholders........................... Not applicable
Item 7. Use of Proceeds................................ Use Of Proceeds
Item 8. General Description of the Registrant.......... Outside Front Cover; The Company; Investment
Objective and Policies; Risk Factors
Item 9. Management..................................... Management
Item 10. Capital Stock, Long-Term Debt, and Other
Securities............................ Description of Units
Item 11. Defaults and Arrears on Senior Securities...... Not applicable
Item 12. Legal Proceedings.............................. Not applicable
Item 13. Table of Contents of the Statement of
Additional Information................ Not applicable
PART B
ITEM NUMBER
- -----------
Item 14. Cover Page..................................... Not applicable
Item 15. Table of Contents.............................. Not applicable
Item 16. General Information and History................ Not applicable
Item 17. Investment Objectives and Policies............. Investment Objective and Policies
Item 18. Management..................................... Management
Item 19. Control Persons and Principal Holders of
Securities............................ Management
Item 20. Investment Advisory and Other Services......... Management
Item 21. Brokerage Allocation and Other Practices....... Brokerage Allocation and Other Practices
Item 22. Tax Status..................................... Certain Federal Income Tax Considerations
Item 23. Financial Statements........................... Financial Statements
</TABLE>
[FLAG]
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is not
an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
Subject to completion, dated February 23, 2000
EXCELSIOR PRIVATE EQUITY FUND III, LLC
$400,000,000
Units of Member Interest
Minimum Subscription -- $25,000
Excelsior Private Equity Fund III, LLC, or the Company, is a newly
organized closed-end investment company. We have elected to be treated as a
business development company under the Investment Company Act. Our
investment objective is to achieve long-term capital appreciation. We will
pursue our objective primarily by investing in domestic venture capital and
other private companies and, to a lesser extent, domestic and international
private funds, negotiated private investments in public companies and
international direct investments that our Investment Adviser believe offer
significant long-term capital appreciation potential. United States Trust
Company of New York and U.S. Trust Company are the Co-Investment Advisers of
the Company and are responsible for selecting our investments. [UST
Management LLC] serves as the Manager of the Company and is responsible for
its administration and for management of its day-to-day affairs.
This Prospectus contains information you should know before
investing, including risk information. Please read it before you invest and
keep it for future reference. Additional information about the Registrant
has been filed with the Securities and Exchange Commission (the
"Commission") and is available upon written or oral request without charge.
In addition, the Commission maintains a Web site (http://www.sec.gov) that
contains material incorporated by reference, and other information
regarding registrants that file electronically with the Commission. You may
also request a free copy by writing or calling the Company at 114 West 47th
Street, New York, New York 10036-1532, (212) 852-3125.
AN INVESTMENT IN THE COMPANY WILL BE ILLIQUID UNTIL ITS UNDERLYING
INVESTMENTS ARE DISTRIBUTED OR LIQUIDATED. INVESTORS MUST BE WILLING AND
ABLE TO BEAR THE RISKS OF AN INVESTMENT IN THE COMPANY UNTIL THAT TIME.
THESE ARE SPECULATIVE SECURITIES. YOU SHOULD INVEST ONLY IF YOU
CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS."
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO SALES LOAD PROCEEDS
PUBLIC TO COMPANY
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit (25 Unit Minimum) $1,000 None $1,000
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Total Minimum (250,00 Units) $250,000 None $250,000
- ----------------------------------------------------------------------------------------
Total Maximum (400,000 Units) $400,000 None $400,000
========================================================================================
</TABLE>
Units are made available through [UST Financial Services Corp.]
and/or certain of its affiliates to clients of U.S. Trust and its
affiliates and others approved by the Company who meet the investor
suitability standards set forth herein. A first subscription closing will
be held on or about the fifth business day after receipt by U.S. Trust of
subscriptions totaling $250,000,000. The Company may continue to offer for
sale the remaining unsold Units and accept subscriptions for such Units
from time to time at subsequent subscription closings until [October 31,
2000]. See "Investor Suitability Standards" and "Selling Arrangements." The
Company reserves the right to withdraw, cancel or modify the offering and
to reject any subscription in whole or in part.
The subscription price of $1,000 per Unit is required to be paid
in two equal installments: $500 per Unit _ upon subscription and $500 on
the first anniversary of the final subscription closing. Investors who
breach their agreement to pay the remainder of their subscription price
will be subject to legal action and various remedies of the Company,
including total forfeiture of their interest in the Company, resulting in a
total loss by the breaching investor of amounts previously paid. Funds paid
by investors will be deposited in an interest-bearing bank escrow account
with U.S. Trust pending each closing. The Company expects to incur
organizational and offering expenses of approximately $ .
The information in this Prospectus is not complete and may be
changed. We may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
Prospectus is not an offer to sell these securities and is not soliciting
an offer to buy these securities in any state where the offer or sale is
not permitted.
The date of this Prospectus is March , 2000.
1
FEE TABLE
Unitholder Transaction Expenses
SALES LOAD (as a percentage of offering price).................... None
ANNUAL EXPENSES (as a percentage of net assets attributable
to Units)
Advisory Fees................................................. 2.00%*
Other Expenses............................................. 0.__%**
Total Annual Expenses......................................... _____%
- ---------------------
* The Advisory Fee through the fifth anniversary of the final
subscription closing date is 2.00% of the Company's net assets,
determined as of the end of each calendar quarter. Thereafter, the
Advisory Fee will be 1.00% of the Company's net assets, determined at
the end of each calendar quarter. The Investment Adviser has agreed
to waive its fee during the subscription period, which will end on
the final subscription closing date. The Manager is also entitled to
an Incentive Carried Interest in an amount equal to 20% of the
Company's cumulative realized net capital gains on investments other
than private funds (determined net of cumulative realized capital
losses and current net unrealized capital depreciation on all of the
Company's investments). See "Management" and "Allocations and
Distributions."
** "Other Expenses" are based on estimated amounts for the current
fiscal year and may be less than 0.__% of the Company's net ---
assets if actual expenses incurred by the Company are lower. The
Investment Adviser has agreed to waive or reimburse such expenses to
the extent they exceed 0.__% of the Company's net assets. See
"Management -- Expenses of the Company."
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return:
Example 1 (1)..................................................... $ $ $____ $____
Example 2 (2)..................................................... $___ $___ $____ $____
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN IN THE EXAMPLES.
The purpose of the above table is to assist the investor in
understanding the various costs and expenses that an investor in the
Company will bear directly or indirectly. To the extent that the Company
invests in other private funds, you will also indirectly through the
Company bear your pro rata share of the fees, expenses and any carried
interest or incentive compensation paid by such funds. For a more complete
description of the various costs and expenses, see "Management" and
"Allocations and Distributions."
- ------------------
(1) Assumes Advisory Fee of 2.00% of the Company's net assets in years
1-5 and 1.00% thereafter and other expenses of 0.__% of the
Company's net assets and does not include the Manager's Incentive
Carried Interest.
(2) Assumes Advisory Fee of 2.00% of the Company's net assets in years
1-5 and 1.00% thereafter and other expenses of 0.% of the
Company's net assets and includes the Incentive Carried Interest.
These expense estimates are based on the assumption that the
entire 5% annual return is the result of realized capital gains on
investments other than private funds.
2
INVESTOR SUITABILITY STANDARDS
THE PURCHASE OF UNITS INVOLVES SIGNIFICANT RISKS AND IS NOT A
SUITABLE INVESTMENT FOR ALL POTENTIAL INVESTORS. SEE "RISK FACTORS."
SUBSTANTIAL MEANS AND NET WORTH. An investment in Units is
suitable only for investors who have no need for liquidity in this
investment and who have adequate means of providing for their annual needs
and contingencies. Accordingly, no Units will be sold to a prospective
investor unless such investor (i) has a net worth (exclusive of homes, home
furnishings and automobiles) of $250,000 or (ii) has a net worth (exclusive
of homes, home furnishings and automobiles) of $60,000 and expects to have
during each of the current and the next three tax years income from any
source of $60,000 or more. Units will not be sold to a trust account unless
such trust account has total assets in excess of $500,000. Residents of
certain states are required to represent that they meet the investor
suitability standards established by such state. See "Terms of the Offering
and Purchase of Units-- Investor Suitability Standards."
ABILITY AND WILLINGNESS TO ACCEPT RISKS. The economic benefit from
an investment in the Company depends upon many factors beyond the control
of the Company and the Investment Adviser. The Company's investments
involve a high degree of business and financial risk that can result in
substantial losses. See "Risk Factors." Accordingly, the suitability for
any particular investor of a purchase of Units will depend upon, among
other things, such investor's investment objectives and such investor's
ability to accept speculative risks. You should invest in the Company only
if you can afford a complete loss of your investment. Units are not a
suitable investment for investors seeking current income.
ABILITY TO ACCEPT LIMITATIONS ON TRANSFERABILITY. Units are not
redeemable prior to the termination of the Company and will be subject to
significant restrictions on transfer. In addition, Units will not be traded
on any securities exchange or other market. AN INVESTMENT IN THE COMPANY
WILL BE ILLIQUID UNTIL ITS UNDERLYING INVESTMENTS ARE DISTRIBUTED OR
LIQUIDATED. INVESTORS MUST BE WILLING AND ABLE TO BEAR THE RISKS OF AN
INVESTMENT IN THE COMPANY UNTIL THAT TIME.
RETIREMENT ACCOUNT CONSIDERATIONS. Most financial and tax planning
experts recommend a balanced investment portfolio for retirement savings
and suggest that the amount of funds to be invested by an employee benefit
plan or a retirement account in high-risk securities, such as the Units, be
appropriate to an investor's particular retirement savings needs. An
investment in the Company also may generate unrelated business taxable
income. The Company recommends that any purchase of Units be considered
accordingly.
PURCHASES ON BEHALF OF MINORS. In the case of a custodian
purchasing Units on behalf of a minor pursuant to the Uniform Gifts to
Minors Act, (i) if the funds used for the purchase of Units are funds
gifted from a donor (who is normally the custodian for and the parent of
the minor) to the minor at the time of purchase of Units, then the donor
must meet the financial suitability standards set forth under "Investor
Suitability Standards" and (ii) if the funds used for the purchase of Units
are funds belonging to the minor prior to the time of the purchase of
Units, then the minor must meet such financial suitability standards.
3
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the more
detailed information included in this Prospectus and to the Operating
Agreement attached hereto as Exhibit A.
THE COMPANY
The Company is a Delaware limited liability company formed on
February 18, 2000. We have elected to be treated as a business development
company under the Investment Company Act. We provide investors with the
opportunity to participate, with a minimum investment of $25,000, in direct
private equity investments and privately offered investment funds managed
by third parties. These investment opportunities are generally not
available to the public and typically require substantially larger
commitments than the minimum investment in the Company. Other advantages
that may otherwise be unavailable to investors if they were to invest
directly in private equity investments include professional management,
portfolio diversification and administrative convenience. We operate more
like a private venture capital fund than a traditional closed-end
investment company. See "The Company," "Regulation," "Risk Factors," "The
Offering," and "Description of Units."
INVESTMENT OBJECTIVE AND POLICIES
The Company's investment objective is to achieve long-term capital
appreciation. Current income is not an objective. We will pursue long-term
capital appreciation primarily by investing in private domestic venture
capital companies and other private companies (collectively, "Venture
Capital Investments"). Venture Capital Investments are domestic companies
in which the equity is closely held by company founders, management and/or
a limited number of institutional investors. Subject to the limitations of
the Investment Company Act, we also intend to invest in domestic and
international venture capital, buyout and other private equity funds
managed by third parties ("Private Funds"), negotiated private investments
in public companies ("Private Placements in Public Companies") and foreign
companies in which the equity is closely held by company founders,
management and/or a limited number of institutional investors
("International Venture Capital Investments"). We refer to Venture Capital
Investments, Private Placements in Public Companies and International
Venture Capital Investments as Direct Investments. Pending investment, for
operating purposes and for temporary or emergency purposes, we will make
liquid investments in interest-bearing bank accounts, money market mutual
funds, U.S. treasury securities and/or certificates of deposit with
maturities of less than one year, commercial paper and other short-term
securities (collectively, the "Short-Term Investments"). We generally will
not make an investment in Private Funds, Private Placements in Public
Companies or International Venture Capital Investments if, immediately
after such investment is made, more than 30% of the value of our total
investment assets would be invested in such assets.
We will seek to invest in opportunities consistent with the
investment philosophy of U.S. Trust, including the portfolio strategies and
investment themes approach used by U.S. Trust in its investment management
and advisory business, the Company however is not constrained or limited in
any way to investments in such strategies and themes. We may from time to
time borrow funds in an amount up to 25% of our total assets (after giving
effect to the borrowing) in order to make additional investments in
existing portfolio companies (referred to as follow-on investments), to
maintain various regulatory qualifications, to pay contingencies and
expenses or in anticipation of the receipt of funds from capital
contributions or the disposition of investments. We do not intend to borrow
in order to make the initial investment in a company. We will not borrow to
pay the advisory fee payable to the Investment Adviser.
There can be no assurance that we will achieve our investment
objective. See "Investment Objective and Policies" and "Risk Factors."
4
MANAGEMENT AND COMPENSATION
The Investment Adviser is responsible pursuant to the Investment
Advisory Agreement for identifying, evaluating, structuring, monitoring and
disposing of our investments. The Manager is responsible pursuant to the
Operating Agreement for providing, or arranging for third parties to
provide any and all management and administrative services reasonably
necessary for the operation of the Company and the conduct of its business.
The [Manager] will also make available personnel and services to portfolio
companies requiring managerial assistance.
The Investment Adviser has served as the investment adviser to UST
Private Equity Investors Fund, Inc. ("Fund I") and Excelsior Private Equity
Fund II, Inc. ("Fund II"), each a registered business development company,
since their inceptions in September 1994 and March 1997, respectively. The
Company's investment objective and policies are similar to those of Fund I
and Fund II, although the Investment Adviser expects to employ an
investment strategy more similar to that of Fund II. As of January 31,
2000, Fund I had made investments in 12 portfolio companies and 6 private
funds with an aggregate of approximately $40 million of invested and/or
committed capital. As of January 31, 2000, Fund II had made investments in
17 portfolio companies and 13 private funds with an aggregate of
approximately $156 million of invested and/or committed capital.
Through the fifth anniversary of the final subscription closing
date, the Company will pay the Investment Adviser an advisory fee equal to
2.00% of net assets, determined as of the end of each calendar quarter.
Thereafter, the advisory fee will be 1.00% of net assets, determined as of
the end of each calendar quarter. The Investment Adviser has agreed to
waive its advisory fee during the subscription period, which will end on
the final subscription closing date.
The Manager will be entitled to allocations and distributions
equal to the Incentive Carried Interest. The Incentive Carried Interest is
an amount equal to 20% of the Company's cumulative realized capital gains
on all Direct Investments determined net of:
o cumulative realized capital losses on all investments of any
type, and
o current net unrealized capital depreciation on all
investments of any type.
The Incentive Carried Interest will be determined annually as of the end of
each year. The Manager's allocations and distributions will be made net of,
respectively, all prior allocations and all prior distributions made to the
Manager.
THE OFFERING
The Company is offering investors the opportunity to subscribe to
make capital contributions to the Company in exchange for membership
interests in the Company. The Company is offering up to 400,000 units of
member interests at a price per unit of $1,000 (the "Units"). Units are
made available through UST Financial Services Corp. and/or certain of its
affiliates and any other selling agents acceptable to the Company
(collectively, the "Selling Agents") to clients of U.S. Trust and others
approved by the Company and its affiliates who meet the investor
suitability standards set forth herein. U.S. Trust may compensate from its
own assets employees of U.S. Trust and its affiliates who sell Units of the
Company to investors. The offering will terminate on [June 30, 2000] or
such other subsequent date not later than [October 31, 2000] as the Manager
may determine (the "Termination Date"). If a minimum of $250,000,000 has
not been subscribed for by the Termination Date, the offering will
terminate and all proceeds from the offering, will be refunded to investors
with any interest earned thereon. See "Risk Factors -- Minimum Proceeds;
Funding and Portfolio Balance."
We expect to have our first closing (the "first subscription
closing") approximately five business days after we have received
subscriptions for at least $250,000,000. The Company may continue to accept
subscriptions for Units from time to time at subsequent closings (each a
"subsequent subscription closing") until the Termination Date. In the event
that the Company receives subscriptions of more than $400,000,000 by the
Termination Date, the Company may, if approved by the Board of Managers and
the Investment Adviser, increase the offering, provided that in no event
will the Company accept subscriptions totaling more than $600,000,000.
5
Each subscriber will be required to complete, execute and deliver
to the Selling Agent an executed copy of the Subscription Agreement
attached hereto as Exhibit B (the "Subscription Agreement"), which will
form a binding contract of the investor. Funds paid by subscribers will be
deposited in an interest-bearing bank escrow account with U.S. Trust of New
York pending each closing. Organizational and offering costs of
approximately $____ ($____ per Unit assuming the minimum of 250,000 Units
are sold, or $_____per Unit assuming all 400,000 Units are sold) have been
incurred by U.S. Trust and will be reimbursed by the Company on or shortly
after the final subscription closing. Each investor's share of
organizational and offering costs will be deducted from his or her capital
account on or shortly after the final subscription closing. Any change in
the price of the Units will be set forth in a supplement to this
Prospectus. See "The Offering." The Company has registered the Units under
the Securities Act of 1933, as amended (the "Securities Act").
Pursuant to the Subscription Agreement, the subscription price of
$1,000 per Unit is required to be paid in two equal installments: $500 upon
subscription and $500 on the first anniversary of the final subscription
closing. If you breach your agreement in the Subscription Agreement to pay
the remainder of the subscription price, you will be subject to legal
action and various remedies of the Company, including total forfeiture of
your interest in the Company. This would result in your total loss of
amounts previously paid.
The Company intends to qualify as a "venture capital
operating company" ("VCOC") under the Plan Asset Regulation issued by the
Department of Labor ("DOL"). Prior to the date the Company qualifies as a
VCOC, the Company will treat its assets as "Plan assets" and will not pay
any expenses or fees to the Investment Adviser or its affiliates from the
assets of the Company. Such fees and expenses will be paid upon
qualification as a VCOC.
MINIMUM INVESTMENTS
The minimum subscription amount is $25,000. We have the right to
waive the minimum, at our discretion. See "The Offering."
USE OF PROCEEDS
We intend to apply the net proceeds of this offering to make
investments in furtherance of our investment objective and policies. See
"Use of Proceeds."
RISK FACTORS
These are speculative securities. Units of the Company are not
deposits or obligations of, or guaranteed or endorsed by, U.S. Trust, and
the Units are not insured by the Federal Deposit Insurance Corporation, the
Federal Reserve Board or any other agency.
RISKS RELATED TO THE COMPANY
Unspecified Use of Proceeds. Since the Company has not identified
the particular uses for the net proceeds from this offering, prospective
investors must rely on the ability of the Investment Adviser to identify
and make portfolio investments consistent with the Company's investment
objective.
Lack of Operating History. While the key personnel of the Investment
Adviser and its affiliates have considerable experience in venture capital
and private equity investing, the Company has recently been formed
and has no operating history of its own upon which an investor may
base an evaluation of the likely performance of the Company.
Minimum Proceeds; Funding and Portfolio Balance. The amount of
funds at the Company's disposal and its portfolio balance could negatively
impact the number and diversity of investments, increasing the Company's
volatility and risk.
Reliance on the Investment Adviser. The investment decisions of
the Company will be made exclusively by the Investment Adviser. Investors
will have no right to take part in the management of the Company.
6
Incentive Carried Interest. The Manager's Incentive Carried
Interest based on 20% of the net realized capital gain of the Company may
create an incentive for the Investment Adviser (an affiliate of the
Manager) to cause the Company to make investments that are riskier or more
speculative than would be the case in the absence of the Incentive Carried
Interest.
Transactions with Affiliates; Potential Conflicts of Interest. The
Investment Company Act generally prohibits transactions between the Company
and its affiliates unless the Company first obtains an exemption order from
the Commission. Delays and costs involved in obtaining necessary approvals
may decrease the profitability of transactions or make them impracticable
or impossible to consummate, and there can be no assurance that the
Commission will grant exemption orders. Conflicts of interest may arise in
allocating management time, services or functions between the Company and
other entities for which the Investment Adviser, the Manager and their
affiliates may provide similar services.
Liabilities of Members. You will not be liable for any obligations
of the Company in excess of your capital, plus your share of undistributed
profits, except that you may be obligated to make capital contributions to
the Company pursuant to the Operating Agreement. However, if you receive a
distribution from the Company and after such distribution the liabilities
of the Company exceed the fair value of the Company's assets (and you had
knowledge of this fact at the time of the distribution) you may be required
to return such distribution to the Company. The company has no intention of
making such distributions. You will not have the right to a return of your
capital contribution except in accordance with the distribution provisions
of the Operating Agreement.
Capital Call. Failure to make your full subscription payment as
required by the Subscription Agreement may result in the forfeiture of your
entire interest in the Company.
No Public or Other Market for Units. The Company is a newly
organized entity. A member may transfer Units only by operation of law
pursuant to the death, bankruptcy, insolvency or dissolution of the member
or otherwise, or with the written consent of the Manager (which it may
withhold in its sole and absolute discretion and will grant, if at all,
only in extenuating circumstances) or in connection with a transfer to a
family trust or another entity that does not result in a change of
beneficial ownership. Any permitted transferees will not, however, be
allowed to become substituted members in the Company without the consent of
the Manager, which consent may be withheld in the sole and absolute
discretion of the Manager. No member will have the right to require the
Company to redeem his, her or its Units. In addition, none of the Company,
the Manager or the Investment Adviser (nor any of their respective
affiliates) will make offers to repurchase Units, and Units will not be
traded on any securities exchange or other market.
FOR THESE VARIOUS REASONS, AN INVESTMENT IN THE COMPANY WILL BE
ILLIQUID UNTIL ITS UNDERLYING INVESTMENTS ARE DISTRIBUTED OR LIQUIDATED.
INVESTORS MUST BE WILLING AND ABLE TO BEAR THE RISKS OF AN INVESTMENT IN
THE COMPANY UNTIL THAT TIME.
Distributions In Kind. The Company may determine to make distributions
of securities or other property in kind. To the extent that the Company does
so, you will incur additional expenses when you determine to dispose of such
securities or other assets. In addition, the determination of whether and when
to dispose of such securities or other assets will be your responsibility.
Such securities or other property may be worth more or less when you
dispose of them than their value at the time of distribution. Although the
Company generally intends to distribute securities prior to liquidation
only if such securities are traded in an active secondary market without
registration, such securities may be subject to a minimum holding period or
other limitations on resale.
Regulation. The Company has elected to be treated as a business
development company under the Investment Company Act, and as such is subject
to numerous restrictions on the nature of its investments, the use of
leverage and the issuance of securities, options, warrants or rights, which
could prohibit the Company from investing in potentially attractive
situations that might otherwise be available.
7
GENERAL RISKS OF INVESTMENTS
Risk of Private Equity Investments. Though private equity
investments offer the opportunity for significant capital gains, such
investments also involve a high degree of business and financial risk that
can result in substantial losses.
Illiquidity of Private Equity Investments. The Company anticipates
that it may take up to four years before it is fully invested or committed
to invest in portfolio companies, and it is unlikely that any significant
distribution of the proceeds from the disposition of private equity
investments will be made until the later years of the Company's term.
Securities laws, contractual limitations and practical limitations may
inhibit the Company's ability to sell, distribute or liquidate its
investments in portfolio companies and could reduce the amount of proceeds
that might otherwise be realized.
Need for Follow-On Investments. There is no assurance that the
Company will have sufficient funds available or choose to make follow-on
investments. Failure to make follow-on investments may have a substantial
impact on portfolio companies in need of such an investment or may result
in a missed opportunity for the Company to increase its participation in a
successful operation.
Competition for Investments. The Company expects to encounter
competition from, and to be a co-investor with, other professional venture
capital, private equity or leveraged buyout groups including several in
which the Company may be an investor.
Borrowing. The use of leverage even on a short-term basis could
have the effect of magnifying increases or decreases in the Company's net
asset value and could result in lenders placing restrictions on the Company
including reserve requirements or operating restrictions that would limit
the ability of the Investment Adviser to control investments or refinancing
and the ability of the Company to make distributions.
Lack of Diversification. The Company intends to operate as a
non-diversified investment company within the meaning of the Investment
Company Act. Thus, the Company may be subject to greater risk of loss than
if its investments were more widely diversified.
ALLOCATIONS, DISTRIBUTIONS AND LIQUIDATION
The Company has been formed as a Delaware limited liability
company and as such is governed by Delaware law and an operating agreement
(the "Operating Agreement") that defines many of the rights and
responsibilities of the Board of Managers, the Manager and members. A copy
of the Operating Agreement is attached hereto as Exhibit A. Investors will
become members of the Company, which will establish a capital account for
each member. Your capital contributions and your share of items of income
and gain will be credited to your capital account, and your distributions
and your share of items of loss, deduction and expense will be debited from
your capital account.
Allocations. The income, gain, loss, deduction and expense of the
Company generally will be determined and allocated as of the end of each
fiscal year to reflect the economic interests of the members and the
Manager.
Company allocations generally will be made in the following
manner:
o all items of income, gain, loss, deduction and expense will
be allocated to the members in an amount equal to the
Members' Allocation pro rata in accordance with the member's
capital contributions, and
o gains will be allocated to the Manager until the cumulative
amount of all gain that has been allocated to the Manager
from the commencement of operations equals the Incentive
Carried Interest calculated through the period for which the
allocation is being made.
8
The Members' Allocation is all items of income, gain, loss,
deduction and expense remaining after allocations have been made to the
Manager.
Distributions. The Company will distribute all cash that the
Manager does not expect to use in the operation of the Company and that is
available after the payment of all expenses then due and the creation of
any reserves. The Company will make such distributions at least annually.
Each year, the Manager generally will be entitled to a distribution equal
to the excess of the Incentive Carried Interest as most recently calculated
over the cumulative amount of all prior distributions made to the Manager.
The members generally will be entitled to all amounts remaining for
distribution pro rata in accordance with their capital contributions.
Due to the nature of the Company's investments, investors should
not expect distributions of cash or property during the first several years
of the Company's operations. The Company will not reinvest income from its
investments or the proceeds from the sale of its investments, in each case
other than Short-Term Investments, except to make follow-on investments.
The Company may make distributions in kind of its property, which generally
would be treated for purposes of the Company's distribution policies as
distributions of cash in an amount equal to the current market value or
fair value of such property determined in accordance with the Company's
valuation procedures.
Liquidation. The duration of the Company will be ten years from
the final subscription closing; however, the Board of Managers has the
right, in its sole discretion, to extend the term for up to two additional
two-year periods, after which the approval of members who represent 66 2/3%
of the Company's outstanding Units may determine to extend the term of the
Company. Upon dissolution of the Company, the affairs of the Company will
be wound up and its assets distributed as provided in the Operating
Agreement. See "Summary of the Operating Agreement."
TAX STATUS OF THE COMPANY
At the first subscription closing, the Company will receive an
opinion of its counsel to the effect that, under current law and based on
certain assumptions and representations, the Company will be treated as a
partnership and not as a publicly traded partnership that is treated as a
corporation for federal income tax purposes. Such opinion will be based
upon the maintenance of certain factual and other conditions, the
continuation of which cannot be assured. No ruling has been or will be
sought from the Internal Revenue Service ("IRS") regarding the status of
the Company as a partnership. An opinion of counsel is not binding on the
IRS or any court. If the Company were treated as a publicly traded
partnership or otherwise as a corporation for federal income tax purposes,
material adverse consequences for the members would result. See "Certain
Federal Income Tax Considerations - Tax Status of the Company."
THE COMPANY
The Company is a newly organized, non-diversified, closed-end
management investment company which has elected to be treated as a business
development company ("BDC") under the Investment Company Act, and which has
registered its securities under the Securities Act of 1933. The Company's
investment objective is to achieve long-term capital appreciation. The
Company pursues its objective primarily by investing in Venture Capital
Investments and, subject to the limitations of the Investment Company Act,
Private Funds, Private Placements in Public Companies and International
Venture Capital Investments which the Investment Adviser believes offer
significant long-term capital appreciation potential. In addition, through
the Manager, the Company will offer managerial assistance to certain
portfolio companies. The Board of Managers may change the Company's status
as a BDC under the Investment Company Act only with the vote of a majority
of the outstanding Units. The Company provides investors with the
opportunity to participate in investments which are generally not available
to the public and typically require substantially larger financial
commitments than the minimum investment in the Company.
The Company was organized as a Delaware limited liability company
on February 18, 2000. Pursuant to the Operating Agreement, the business
and affairs of the Company are overseen by a three member Board of
Managers, two of whom are not "interested persons" of the Company or its
affiliates as that term is defined in the
9
Investment Company Act. The Board of Managers is analogous to a Board of
Directors of a corporation. Pursuant to the Operating Agreement, the
Manager is entitled to the investment advisory fee and is responsible for
providing, or arranging for third parties to provide, any and all
management and administrative services reasonably necessary for the
operation of the Company and the conduct of its business. The Investment
Adviser is also entitled to the Incentive Carried Interest, subject to the
supervision of the Board of Managers. Pursuant to the Investment Management
Agreement, the Investment Adviser, subject to the supervision of the Board
of Managers, is responsible for finding, evaluating, structuring,
monitoring and liquidating the Company's investments as described in
"Management." The Company's, the Manager's and U.S. Trust of New York's
principal office is located at 114 West 47th Street, New York, New York
10036-1532, and the telephone number of the Company is (212) 852-3125. U.S.
Trust Company's principal office is located at 225 High Ridge Road,
Stamford, Connecticut, 06905.
The duration of the Company will be ten years from the final
subscription closing; however, the Board of Managers has the right, in its
sole discretion, to extend the term for up to two additional two-year
periods, after which the approval of members who represent 66 2/3% of the
Company's outstanding Units may determine to extend the term of the
Company. Upon dissolution of the Company, the affairs of the Company will
be wound up and its assets distributed as provided in the Operating
Agreement.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Company is to seek long-term
capital appreciation. Current income is not a significant factor in the
selection of investments. We will pursue long-term capital appreciation
primarily by investing in private domestic venture capital companies and
other private companies (collectively, "Venture Capital Investments").
Venture Capital Investments are domestic companies in which the equity is
closely held by company founders, management and/or a limited number of
institutional investors. Subject to the limitations of the Investment
Company Act, we also intend to invest in domestic and international venture
capital, buyout and other private equity funds managed by third parties
("Private Funds"), negotiated private investments in public companies
("Private Placements in Public Companies") and foreign companies in which
the equity is closely held by company founders, management and/or a limited
number of institutional investors ("International Venture Capital
Investments"). We refer to Venture Capital Investments, Private Placements
in Public Companies and International Venture Capital Investments as Direct
Investments. Pending investment, for operating purposes and for temporary
or emergency purposes, the Company will invest in Short-Term Investments.
Although the Company's objective is to seek long-term capital appreciation,
there is no minimum holding period for the Company's investments and the
Company may sell any investment at any time that the Investment Adviser
believes it is advantageous to do so.
As a BDC, the Company must invest at least 70% of its assets
("qualifying assets") in certain specified investments, including
securities of companies that qualify as "eligible portfolio companies"
under the Investment Company Act. The Company may maintain up to 30% of its
assets in non-qualifying assets; however, the Company intends to retain
maximum flexibility in connection with its investments and, therefore, does
not have a policy as to the minimum percentage of its assets that will be
so invested. See "The Company" and "Regulation."
Venture Capital Investments
We will seek to achieve our investment objective by investing
primarily in Venture Capital Investments. We may also commit to invest
funds in a Venture Capital Investment beyond our initial investment or
guarantee the obligations of a Venture Capital Investment. We will attempt
to reduce the risks inherent in private equity investing by investing in a
diversified portfolio of companies involved in different industries and
different stages of development, through the utilization of professional
management provided by the Investment Adviser in the selection of private
equity investments and through the active monitoring of such investments.
10
Other Private Equity Investments
Subject to the limitations of the Investment Company Act, we may
invest in Private Funds, International Venture Capital Investments and
Private Placements in Public Companies (collectively, "Other Private Equity
Investments"). We generally will not make an investment in Other Private
Equity Investments if, immediately after such investment is made, more than
30% of the value of our total investment assets would be invested in such
assets. Any Private Fund investments will generally be made in domestic or
foreign venture capital, buyout or other private equity funds managed by
third parties. We do not expect to invest more than 10% of our total assets
in any one Other Private Equity Investment. The Investment Adviser will not
have a role in the management of Private Funds. Private Funds typically
charge a management fee and an incentive fee based upon gains. These fees
are in addition to the management fees payable to the Investment Adviser,
although the Manager's Incentive Carried Interest will not be based on
gains from Private Funds.
The Investment Adviser will evaluate the ability of prospective
investments to produce long-term capital appreciation based upon criteria
that may be modified from time to time. The criteria that will initially be
used by the Investment Adviser in determining whether to make an investment
include:
(i) The presence or availability of strong management;
(ii) The existence of a substantial market for the products or
services of a potential portfolio company, characterized by
favorable growth potential, or a substantial market position
in a stable industry;
(iii) The opportunity for liquidity to eventually be obtained for
the proposed investment through an initial public offering
or through a sale of the business.
(iv) A willingness of a potential portfolio company to permit us
and our co-investors, if any, to take a substantial position
in the company and have representation on its board of
directors or a right to attend board meetings as a nonvoting
participant, so as to enable us to influence the strategic
direction of the company.
Although the Company is a non-diversified company as defined in
the Investment Company Act, we do not expect to invest more than 10% of our
total assets in any one portfolio company or Private Fund. While we retain
the flexibility to invest in all types of industries, we currently intend
to make investments in companies engaged in businesses that are consistent
with the general investment philosophy used by U.S. Trust in its investment
management advisory business. U.S. Trust follows a long-term investment
philosophy based on identifying opportunities with sustainable fundamental
values and uses two specific portfolio strategies to guide investment
decision-making.
U.S. Trust's first strategy is one of growth. This strategy seeks
to identify industries and companies with the capabilities to provide
solutions to or benefit from markets which are growing in response to
underlying trends, such as companies' need to enhance productivity through
technological innovation or the changing demographics of the U.S.
population. U.S. Trust's second strategy is a "transaction value"
comparison of a company's real underlying asset value with similar assets
changing ownership in market transactions. Differences between a company's
real asset value and the price of its shares often are corrected over time
by restructuring of the assets or by market recognition of their value.
The two portfolio strategies discussed above are applied together
with several "longer-term investment themes" to help identify specific
investment opportunities. U.S. Trust believes that the longer-term themes
described below represent strong and inexorable trends and that the
beneficiaries of these trends will be rewarded in the long-term.
o Communication and Information -- companies benefiting from
the technological and international transformation of the
communications and information industries, particularly the
convergence of information, communication and entertainment.
11
o Productivity Enhancers -- companies benefiting from their
roles as innovators, developers, and/or suppliers of goods
and services which enhance service and manufacturing
productivity or companies that are most effective at
obtaining and applying productivity enhancements.
o Infrastructure Development -- companies benefiting from the
development and expansion of global infrastructure
expenditure.
o Early Life Cycle -- companies in an earlier stage of
development looking to exploit new market opportunities.
o Demographics/Rising Living Standards -- companies concerned
with the quality characteristics, lifestyles and changing
demographic profiles of individuals, families and companies.
o Globalization Forces -- companies benefiting from their
position as effective and strong competitors on a global
basis.
o Business and Industrial Restructuring -- companies
benefiting from their restructuring or redeployment of
assets and operations in order to become more competitive or
profitable.
INVESTMENT PRACTICES
Borrowing. The Company may from time to time borrow funds for
operating purposes in an amount up to 25% of the value of its total assets
(after giving effect to the borrowing) in order to make additional
investments in existing portfolio companies, to maintain various regulatory
qualifications or to pay contingencies and expenses. If the Company borrows
funds (other than through a private loan), distributions to Unitholders or
the repurchase of Units generally is prohibited under the Investment
Company Act unless the ratio of our total assets (less liabilities and
indebtedness not subject to this test) to the amount of all such borrowings
is at least 200% at the time of and after giving effect to the distribution
or repurchase. In general, the Company does not intend to borrow for
investment purposes other than for the purpose of making additional
investments in existing portfolio companies and will not borrow to pay the
management fee payable to the Investment Adviser. See "Regulation."
The use of leverage even on a short-term basis will have the
effect of magnifying increases or decreases in the Company's net asset
value. We also expect that, as a condition to lending, lenders may place
restrictions on us, which may include reserve requirements or operating
restrictions, and may limit our ability to make distributions. There can be
no assurance that the Company will borrow when considered desirable. The
Company may not be able to arrange debt financing on terms acceptable to
the Manager and the Board of Managers, or the Manager and the Board of
Managers may believe borrowings are not in the Company's best interest. If
the Company were unable to obtain debt financing, the Company might be
required to sell a portfolio investment at an inopportune time, or to
forego the purchase of an attractive investment. In either case, the value
of the Company's investment portfolio, and of the Units, could be adversely
affected. See "Risk Factors -- Borrowing."
Other Investment Policies. The Company will not sell securities
short or on margin. Except for hedging purposes, the Company will not write
puts or calls or purchase or sell commodities or commodity contracts. The
Company will not underwrite the issuance of securities of other companies.
Realized and unrealized gains and losses on hedging instruments used to
hedge Direct Investments will be treated as realized or unrealized gains or
losses on such Direct Investments for purposes of the Company's allocation
and distribution policies.
The Company will not lend its assets to any person or individual,
except through the purchase of bonds or other debt obligations customarily
sold to institutional investors. However, the Company may, subject to
limitations of the Investment Company Act, lend portfolio securities if
collateral values are continuously maintained at no less than 100% by
"marking to market" daily. The collateral received will consist of cash,
U.S. short-term government securities, bank letters of credit or such other
collateral as may be permitted under the Company's investment objective and
policies and by regulatory agencies and approved by the Board of Managers
of the Company. While a loan of portfolio securities is outstanding, the
Company will continue to receive the equivalent of the interest or
dividends paid by the issuer on the securities, as well as interest on the
investment of the collateral
12
or a fee from the borrower. The risks in lending portfolio securities, as
with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in recovery of the securities or
possible loss of rights in the collateral should the borrower fail
financially.
The Company will not invest in real estate or oil, gas or other
mineral leases, either directly or indirectly (including limited
partnership interests of entities which invest in real property or
interests in oil, gas or minerals), although the Company may invest in
other entities whose business involves the holding or acquisition of real
estate or the holding or making of such leases.
The Company's objective and its policies (other than its status as
a BDC) are not deemed to be fundamental policies and all may be changed at
any time and from time to time by the Board of Managers without member
approval.
RISK FACTORS
The Shares offered hereby involve a high degree of risk,
including, but not limited to, the risk factors described below. Each
prospective investor should carefully consider the following risk factors
inherent in and affecting the business of the Company and this offering
before making an investment decision. Prospective investors should consider
the information set forth under "Management -- Potential Conflicts of
Interest."
A. RISKS RELATED TO THE COMPANY
Lack of Operating History
While the key personnel of the Investment Adviser and its
affiliates have considerable experience in venture capital and private
equity investing, including experience with Fund I and Fund II, the Company
has recently been formed and has no operating history of its own upon which
an investor may base an evaluation of the likely performance of the
Company.
Minimum Proceeds; Funding and Portfolio Balance
The Company will begin operations upon the sale of a minimum of
250,000 Units or a minimum capitalization of approximately $250,000,000.
The number of investments, portfolio balance and potential profitability of
the Company could be affected by the amount of funds at its disposal and,
with the minimum capitalization, the Company's investment return might be
adversely affected. The funding level could negatively impact the number
and diversity of investments, increasing the Company's volatility and risk.
Reliance on the Investment Adviser
The investment decisions of the Company will be made exclusively
by the Investment Adviser. Investors will have no right or power to take
part in the management of the Company and will not receive the detailed
financial information made available by issuers to the Investment Adviser
and the Manager in connection with the review of possible purchases for the
Company's portfolio. Accordingly, investors must be willing to entrust all
management aspects of the Company to the Investment Adviser and the
Manager.
Regulation
The Company has elected to be treated as a BDC under the
Investment Company Act. The applicable provisions of the Investment Company
Act impose numerous restrictions on the activities of the Company,
including restrictions on the nature of its investments, its use of
leverage and its issuance of securities, options, warrants or rights. Among
the restrictions is the requirement that a majority of the Board of
Managers be individuals who are not "interested persons" within the meaning
of the Investment Company Act and that the Company must generally invest at
least 70% of its assets in securities of companies that meet the
requirements for "eligible portfolio companies" under the Investment
Company Act. In addition, a BDC must make significant managerial assistance
available to a significant number of the companies whose securities it
purchases. The Investment Adviser and Manager believe that the constraints
applicable to BDCs are consistent with the objectives of the Company.
However, such
13
constraints could prohibit the Company from investing in some potentially
attractive situations that might otherwise be available if such an
investment would not disqualify the Company from its status as a BDC.
There are relatively few judicial decisions under and
administrative interpretations of the portions of, the Investment Company
Act applicable to the Company, and there can be no assurance that such
provisions will be interpreted or administratively implemented in a manner
consistent with the Company's objectives and intended manner of operation.
In the event that the Board of Managers determines that it cannot operate
effectively as a BDC, the Board of Managers may at some future date decide
to withdraw the Company's election to be treated as a BDC and transform it
into an operating company not subject to regulation under the Investment
Company Act and the special income tax provisions available to
"regulated investment companies" under the Code, or cause the Company
to be liquidated. Should the Board of Managers seek to withdraw such
election, it must obtain the approval of members who represent a majority
of the Company's outstanding Units. See "Regulation."
Transactions with Affiliates; Potential Conflicts of Interest
The Investment Company Act restricts transactions between the
Company and any "affiliated person" (as defined in the Investment Company
Act) including, among others, the Company's officers, members of its Board
of Managers, principal Unitholders, employees, the Investment Adviser, the
Manager and any other affiliates of the Company. In many cases, the
Investment Company Act prohibits transactions between the Company and such
persons unless the Company first applies for and obtains an exemptive order
from the Commission. Delays and costs involved in obtaining necessary
approvals may decrease the profitability of such transactions or make it
impracticable or impossible to consummate such transactions. Further,
provisions of the Federal Reserve Act impose restrictions on certain types
of transactions ("covered transactions") between a member bank and its
affiliates, as defined in those provisions. For purposes of these
provisions, the Company is an "affiliate" of the Investment Adviser, the
Manager and Fund I and Fund II.
Prior to commencement of operations, the Company's Board of
Managers will implement written procedures approved by a majority of the
disinterested members of the Board of Managers that are designed to
regulate investment activity by affiliates in conflict with or in
conjunction with the Company's activities, including adopting a code of
ethics containing provisions designed to prevent employees from engaging in
acts prohibited by Rule 17j-1 under the Investment Company Act. However,
circumstances could develop which would require Commission approval in
advance of proposed transactions by the Company or its affiliates with
portfolio companies or their affiliates. Depending upon the extent of the
Investment Adviser's influence and control with respect to such portfolio
companies, the selection of any affiliates of the Investment Adviser to
perform various services for portfolio companies may not be a disinterested
decision and the terms and conditions for the performance of such services
and the amount and terms of compensation to be received therefor may not be
determined in arms-length negotiations, although the terms and conditions
of any such selection are expected to be consistent with those which would
be offered in good faith to an unaffiliated third party retained to provide
such services. The selection of the Investment Adviser or any of its
affiliates to perform services for a portfolio company must be approved by
a majority of the disinterested members of the Board of Managers of the
Company and the independent and disinterested directors of the portfolio
company.
In addition, officers, employees and members of the Board of
Managers of the Company or officers, employees, directors, partners or
members, its affiliates, including the Investment Adviser and the Manager,
may serve as directors of or as consultants to certain portfolio companies
and, in connection therewith, may earn consulting fees, finder's fees, and
other fees and commissions, which may be paid in the form of cash,
securities or other forms of consideration. While the Investment Adviser is
obligated to use its best efforts to provide the Company with a continuing
and suitable investment program consistent with its investment objective
and policies, the Investment Adviser is not required to present to the
Company any particular investment opportunity that falls within the
investment objective and policies of the Company except as set forth in the
procedures adopted by the Company's Board of Managers. Such procedures
provide that the Investment Adviser must endeavor to offer to the Company
on an equitable basis investment opportunities that would be suitable for both
the Company and other similar private equity funds for which the Investment
Adviser provides discretionary investment advisory services. The Company's
portfolio companies may also enter into certain financial arrangements with
the Company and/or its affiliates subject to appropriate regulatory
guidelines or approvals as required. The Company may seek an exemptive
order from the Commission relieving the Company, subject to certain terms
and conditions, from certain provisions of the
14
Investment Company Act to permit co-investments by the Company with certain
affiliates of the Company or the Investment Adviser, including certain
companies or funds that may be set up in the future. Such co-investments
will be in specified amounts and on terms and conditions that are the same
in all material respects, subject to the availability of capital for
investment on the part of the Company and each such affiliate and certain
other considerations. There can be no assurance that the Commission will
grant such an order or that such affiliates will have capital available to
co-invest with the Company. See "Regulation." The Investment Adviser and
its affiliates will not enter into any such arrangement with a portfolio
company unless such arrangement has been approved by a majority of the
disinterested members of the Board of Managers of the Company and by the
independent directors of the portfolio company who also have no interest in
the arrangement. Because of their potentially varying investment objectives
or other factors, conflicts could arise between the Company and its
affiliates relating to such co-investments, which can only be resolved
through the exercise by the Investment Adviser of such judgment as is
consistent with its fiduciary duties to the Company. Even with the proper
exercise of such judgment, however, there can be no assurance that
potential conflicts will be resolved in a manner favorable to the Company.
The Company will not have independent management or employees and will rely
upon the Investment Adviser, the Manager and their affiliates for
management and administration of the Company and its assets. Conflicts of
interest may arise in allocating management time, services or functions
between the Company and other entities for which the Investment Adviser or
Manager and their affiliates may provide similar services. The Company's
Board of Managers will supervise the activities of the Investment Adviser
and the Manager. See "Management -- Potential Conflicts of Interest."
Unspecified Use of Proceeds
Inasmuch as the Company has not identified the particular uses for
the net proceeds from this offering other than to make investments on the
basis of opportunities as they may arise, prospective investors must rely
on the ability of the Investment Adviser to identify and make portfolio
investments consistent with the Company's investment objective. Investors
will not have the opportunity to evaluate personally the relevant economic,
financial and other information which will be utilized by the Investment
Adviser in deciding whether or not to make a particular investment or to
dispose of any such investment. See "Use of Proceeds."
Federal Income Taxation
Tax Status of the Company. At the first subscription closing, the
Company will receive an opinion of its counsel to the effect that, under
current law and based on certain assumptions and representations, the
Company will be treated as a partnership and not as a "publicly traded
partnership" that is a corporation for federal income tax purposes. Such
opinion will be based upon the maintenance of certain factual and other
conditions, the continuation of which cannot be assured. No ruling has been
or will be sought from the IRS regarding the status of the Company as a
partnership. An opinion of counsel is not binding on the IRS or any court.
A limited liability company (such as the Company) that has elected
to be treated as a business development company under the Investment
Company Act would be treated as a corporation for federal income tax
purposes if it became a publicly traded partnership. If the Company were
treated as a publicly traded partnership or otherwise as a corporation for
federal income tax purposes, material adverse consequences for the members
would result. The Company would be subject to tax on its income at
corporate tax rates, without a deduction for any distribution to the
members, thereby materially reducing the amount of any cash available for
distribution to the members. In addition, capital gains and losses and
other income and deductions of the Company would not be passed through to
the members, and the members would be treated as shareholders for federal
income tax purposes. Thus, all distributions by the Company to the members
would be treated as dividends, return of capital and/or gains. See "Certain
Federal Income Tax Considerations - Tax Status of the Company."
Taxation of Members on Company Profits and Losses. The Company, if
treated as a partnership for tax purposes as discussed above, will not
itself be subject to federal income tax. Rather, each member in computing
its federal income tax liability for a taxable year will be required to
take into account his, her or its allocable share of Company items of
income, gain, loss, deduction and expense for the taxable year of the
Company ending within or with such taxable year of the member, regardless
of whether the member has received any distributions from the Company.
Prospective investors should also be aware that they will be subject to
various limitations on their ability to deduct their allocable share of
Company losses (or items of loss and deduction thereof). For this reason
and various other reasons, it is possible that a member's federal income
tax liability with respect to his, her or its allocable
15
share of the Company's earnings in a particular year could exceed the cash
distributions to the member for the year, thus giving rise to an
out-of-pocket payment by the member.
Tax Exempt Investors. The Company may from time to time borrow
funds for operating purposes in an amount up to 25% of the value of its total
assets (after giving effect to the borrowing) in order to make additional
investments in existing portfolio companies, to maintain various
regulatory qualifications or to pay contingencies and expenses. To the
extent that the Company does so, an investment in the Company will generate
unrelated business taxable income for federal income tax purposes (and may
have other adverse tax consequences) for pension funds, Keogh plans,
individual retirement accounts, tax-exempt institutions and other
tax-exempt investors.
General. In view of the complexity of the tax aspects of the
offering, particularly in light of recent changes in the law and the fact
that certain of the tax aspects of the offering will not be the same for
all investors, prospective investors must consult their own tax advisors
with specific reference to their own tax situations prior to investing in
the Company. No assurance can be given that the current federal income tax
treatment applicable to an investment in the Company will not be modified
by legislative, administrative or judicial action in the future. Any such
changes may retroactively affect existing transactions and investments.
Prospective investors must also consult their own tax advisors with respect
to the effects of applicable state, local and non-U.S. tax laws.
The foregoing is a summary of certain significant federal income
tax risks relating to an investment in the Company. This summary should not
be interpreted as a representation that the matters referred to herein are
the only tax risks involved in this investment or that the magnitude of
such risks is necessarily equal. For a more detailed discussion of these
and other federal income tax risks of an investment in the Company, see
"Certain Federal Income Tax Considerations."
Liability of Investors
You will not be liable for any obligations of the Company in
excess of your capital, plus your share of undistributed profits, except
that you may be obligated to make capital contributions to the Company
pursuant to the Operating Agreement. However, if you receive a distribution
from the Company and after such distribution the liabilities of the Company
exceed the fair value of the Company's assets (and you had knowledge of
this fact at the time of the distribution) you may be required to return
such distribution to the Company. The Company has no intention of making
such distributions. You will not have the right to a return of your capital
contribution except in accordance with the distribution provisions of the
Operating Agreement.
No Public or Other Market for Units
No person may become a substitute member without the written
consent of the Manager, which may withhold its consent for any reason in
its sole and absolute discretion. A member may transfer Units only by
operation of law pursuant to the death, bankruptcy, insolvency or
dissolution of the member or otherwise, or with the written consent of the
Manager (which it may withhold in its sole and absolute discretion and will
grant, if at all, only in extenuating circumstances) or in connection with
the transfer to a family trust or another entity that does not result in a
change in beneficial ownership. Notice to the Company of any proposed
transfer must include evidence satisfactory to the Manager that the
proposed transferee meets any eligibility and suitability standards and
must be accompanied by properly completed transfer documents.
Any transferee that acquires Units by operation of law as a result
of death, bankruptcy, insolvency or dissolution of the member or otherwise
shall be entitled to the allocations and distributions, if any, with
respect to the Units so acquired and to transfer those Units subject to the
restrictions of the Operating Agreement, but shall not be entitled to the
other rights of a member unless and until that transferee becomes a
substituted member as provided in the Operating Agreement. If a member
transfers Units with the approval of the Manager under the policies
established by the Company, the Company shall promptly take all necessary
actions so that each transferee or successor to whom those Units is
transferred is admitted to the Company as a member. Each member and
transferee must pay all expenses, including attorneys' and accountants'
fees, incurred by the Company in connection with such transfer.
By subscribing for Units, each member will agree to indemnify and
hold harmless the Company, the Investment Adviser, the Manager, each other
member and any affiliate of the foregoing against all losses, claims,
16
damages, liabilities, costs and expenses (including losses, claims,
damages, liabilities, costs and expenses of any judgments, fines and
amounts paid in settlement), joint or several, to which those persons may
become subject by reason of or arising from any transfer made by that
member in violation of these provisions or any misrepresentation made by
that member in connection with any such transfer.
Distributions In Kind. The Company may determine to make
distributions of securities or other property in kind. To the extent that
the Company does so, you will incur additional expenses when you determine
to dispose of such securities or other assets. In addition, the
determination of whether and when to dispose of such securities or other
assets will be your responsibility. Such securities or other property may
be worth more or less when you dispose of them than their value at the time
of distribution. Although the Company generally intends to distribute
securities prior to liquidation only if such securities are traded in an
active secondary market without registration, such securities may be
subject to a minimum holding period or other limitations on resale.
B. GENERAL RISKS OF INVESTMENTS
Risk of Private Equity Investments
While the Company will be a non-diversified company as defined by
the Investment Company Act, it does not expect to invest more than 10% of
its total assets in any one portfolio company. The Company's investments in
Private Funds serve to further diversify its holdings. Since the Company's
assets may be concentrated in relatively few investments, substantial
declines in the values of its investments could have a material adverse
effect on the net asset value of the Company. Although private equity
investments offer the opportunity for significant capital gains, such
investments involve a high degree of business and financial risk that can
result in substantial losses. Among these are the risks associated with
investment in companies in an early stage of development or with little or
no operating history, companies operating at a loss or with substantial
variation in operating results from period to period, companies with the
need for substantial additional capital to support expansion or to maintain
a competitive position, or companies with significant financial leverage.
Such companies may also face intense competition from others including
those with greater financial resources, more extensive development,
manufacturing, distribution or other attributes, over which the Company
will have no control. The Company anticipates that it may also make
investments in high-technology companies that may face risks of product
obsolescence.
Illiquidity of Private Equity Investments
Because of the competition for investments that meet the
requirements for "qualifying assets," the Company anticipates that it may
take up to four years before it is fully invested or committed to invest in
portfolio companies. Private equity investments may typically take from two
to seven years from the date of initial investment to reach a state of
maturity at which disposition can be considered. In light of the foregoing,
it is unlikely that any significant distribution of the proceeds from the
disposition of private equity investments will be made until the later
years of the Company's term.
The Company's private equity investments will consist primarily of
securities that are subject to restrictions on sale by the Company because
they were acquired from the issuer in "private placement" transactions or
because the Company is deemed to be an affiliate of the issuer. Generally,
the Company cannot sell these securities publicly without the expense and
time required to register the securities under the Securities Act or sell
the securities under Rule 144 or other rules under the Securities Act which
permit only limited sales under specified conditions. When restricted
securities are sold to the public, the Company may be deemed an
"underwriter" or possibly a controlling person under the Securities Act and
be subject to liability as such under the Securities Act.
In addition, contractual or practical limitations may inhibit the
Company's ability to sell, distribute or liquidate its investments in
portfolio companies because the issuers are privately held, because the
Company owns a relatively large percentage of the issuer's outstanding
securities, or because joint venture associates, other investors, financial
institutions, or management are relying on the Company's continued
investment. Sales may also be limited by financial market conditions, which
may be unfavorable for sales of securities of particular issuers or issuers
in particular markets. The above limitations on liquidity of the Company's
portfolio investments could prevent a successful sale and result in the
delay of any sale or reduction in the amount of proceeds that might
otherwise be realized. Although the Company will reflect these restrictive
factors in the valuation of its investments, no assurance
17
can be given that the estimated values will represent the return that might
ultimately be realized by the Company from the investment. See "Valuation
of Portfolio Securities."
Need for Follow-On Investments
Following its initial investments in portfolio companies, the
Company anticipates that it may be called upon to provide additional funds
to portfolio companies or have the opportunity to increase investments in
successful operations. Although the Company may borrow to make follow-on
investments, there is no assurance that the Company will make follow-on
investments or that the Company will have sufficient funds to make such
investments. Any decision by the Company not to make follow-on investments
or its inability to make them may have a substantial impact on portfolio
companies in need of such an investment or may result in a missed
opportunity for the Company to increase its participation in a successful
operation.
Competition for Investments
The Company expects to encounter competition from other entities
having similar investment objectives. Historically, the primary competition
for venture capital, buyout, and other private equity investments has been
from venture capital, buyout and private equity partnerships and
corporations, private equity affiliates of large industrial and financial
companies, small business investment companies, and wealthy individuals.
The Company will frequently be a co-investor with other professional
venture capital, private equity or leveraged buyout groups including
several in which the Company may be an investor. These relationships with
other groups should expand the Company's access to investment
opportunities.
In addition, it is possible that there may be circumstances under
which an additional investment would be considered an affiliated
transaction, requiring prior Commission approval. The receipt of an
exemptive order from the Commission could be time consuming and costly and
there can be no assurance that such approval would be obtained.
Borrowing
In general, the Company does not intend to borrow funds for
investment purposes. However, the Company may borrow funds to facilitate
the making of follow-on investments, to maintain various regulatory
qualifications or to pay contingencies and expenses. The Company will not
borrow to pay the advisory fee payable to the Investment Adviser. The
Company is permitted under the Investment Company Act to borrow funds if,
immediately after the borrowing, it will have an asset coverage (as defined
in the Investment Company Act) of at least 200%. The amount and nature of
any borrowings will depend upon a number of factors over which neither the
Board of Managers nor the Investment Adviser has control, including general
economic conditions, conditions in the financial markets and the impact of
the financing on the tax treatment of the members. Subject to the
foregoing, the Company may borrow funds in an amount up to 25% of the value
of its assets. See "Investment Objective and Policies -- Borrowing."
Although the Company does not intend to borrow funds to make
initial investments, the use of leverage even on a short-term basis could
have the effect of magnifying increases or decreases in the Company's net
asset value. The Company also expects that, as a condition to lending,
lenders may place restrictions on the Company, which may include reserve
requirements or operating restrictions, and may limit the ability of the
Company to make distributions to members. There can be no assurance that
debt financing will be available on terms that the Manager considers to be
acceptable and in the best interests of the Company. If borrowing is
unavailable, the Company may be required to make an untimely disposition of
an investment.
Lack of Diversification
The Company intends to operate as a non-diversified investment
company within the meaning of the Investment Company Act and, therefore,
the Company's investments may not be substantially diversified. In any
event, the Company will not be able to achieve the same level of
diversification as much larger entities engaged in similar activities. The
Company's assets may be subject to greater risk of loss than if they were
more widely
18
diversified, inasmuch as the failure of one or more of a limited number of
investments could have a greater adverse effect on the Company than the
failure of one of a large number of investments, See "Investment Objective
and Policies."
THE OFFERING
The Company is offering investors the opportunity to subscribe to
make capital contributions to the Company in exchange for membership
interests in the Company. The Company is offering up to 400,000 Units at a
price per Unit of $1,000. The minimum subscription is $25,000. We have the
right to waive the minimum at our discretion. There are no sales charges or
other commissions payable in connection with the purchase of the Units. If
subscriptions for a minimum of $250,000,000 have not been received by the
Termination Date, the offering will terminate and all proceeds from the
offering will be refunded to investors with any interest earned thereon and
without any deductions. See "Risk Factors -- Minimum Proceeds; Funding and
Portfolio Balance."
Each investor will be required to complete, execute and deliver to
the Selling Agent an executed copy of the Subscription Agreement, which
will form a binding contract of the investor. The Subscription Agreement
must be accompanied by a money transfer or check payable to the order of
"United States Trust Company of New York -- Escrow Agent" in the amount of
$500 for each Unit subscribed for, representing the initial capital
contribution per Unit. The remaining $500 per Unit will be required to be
paid on the first anniversary of the final subscription closing. We will
give you or your designated representative at least 30 business days'
notice of the second contribution date, which notice will specify the date
for payment and amount required to be paid.
If any member fails to make the second payment when due, the
Company will give the member immediate notice of default. If such member
fails to cure such default promptly after receiving the notice of default
from the Company, the Company may take such action as may be necessary,
including enforcing the Subscription Agreement in any court of competent
jurisdiction. The Company may in its sole discretion elect instead to avail
itself of any other remedies afforded under Delaware law, including
potentially complete forfeiture to the Company of the delinquent member's
Units. This would result in the complete loss of amounts previously
contributed by the delinquent member.
Funds paid by subscribers will be deposited in an interest-bearing
bank escrow account with U.S. Trust of New York pending each closing. In
the event the Company rejects a subscriber's Subscription Agreement or a
subscriber elects to withdraw his subscription prior to his or her initial
subscription closing date, U.S. Trust of New York will promptly deliver to
such subscriber all funds received; any interest earned on such funds will
be returned within five business days of the next subscription closing
after such rejection or withdrawal.
We expect that a first subscription closing will be held on or
about the fifth business day after receipt of subscriptions for at least
$250,000,000. The Company may continue to offer the remaining unsold Units
and accept subscriptions for such Units from time to time at subsequent
closings until the Termination Date. In the event that the Company receives
subscriptions for more than $400,000,000 by the Termination Date, the
Company may, if approved by the Board of Managers and the Investment
Adviser, increase the offering, provided that in no event will the Company
accept subscriptions totaling more than $600,000,000. Within five days
after each closing, U.S. Trust will mail to each subscriber checks in the
respective amounts of interest earned by funds held in escrow. If the
minimum of 250,000 Units are sold, any charges or expenses associated with
the escrow account will be paid by the Investment Adviser.
INVESTOR SUITABILITY STANDARDS
Units will be sold only to prospective investors who represent
that they (i) have a net worth (exclusive of homes, home furnishings and
automobiles) of $250,000 or (ii) have a net worth (exclusive of homes, home
furnishings and automobiles) of $60,000 and expect to have during each of
the current and the next three tax years income from any source of $60,000
or more. In addition, Units will not be sold to a trust account unless such
trust account has total assets in excess of $500,000. Residents of certain
states are required to represent that they meet the investor suitability
standards established by such state.
19
The Company intends to qualify as a VCOC under the Plan Asset
Regulation issued by the DOL. Prior to the date the Company qualifies as a
VCOC, the Company will treat its assets as "Plan assets" and will not pay
any expenses or fees to the Investment Adviser or its affiliates from the
assets of the Company. Such fees and expenses will be paid upon
qualification as a VCOC.
USE OF PROCEEDS
The net proceeds to the Company from this offering will be
$400,000,000 if all Units are sold and before deducting organizational and
initial offering expenses estimated to be approximately [$_________].
No portion of the net proceeds of the offering has been allocated
to any particular investment. However, the proceeds will be utilized in a
manner consistent with the Investment Company Act and the Company's
investment objective and policies. Pending investment, for operating
purposes and for temporary or emergency purposes, such proceeds will be
invested in Short-Term Investments.
It is anticipated that there will be a significant period of time (up
to four years) before the Company becomes fully invested. Although the Company
intends to invest or commit to invest at least 50% of the proceeds from this
offering in Venture Capital Investments within approximately two years after the
receipt of such proceeds, a delay is common for BDCs because of the competition
for investments in entities that meet the requirements for "qualifying assets"
under the Investment Company Act. Further, investments in Venture Capital
Investments and other Direct Investments may typically take from two to seven
years from the date of initial investment to reach a state of maturity at which
disposition can be considered. In light of the foregoing, it is unlikely that
any significant distribution of the proceeds from the disposition of Venture
Capital Investments and other Direct Investments will be made until the later
years of the existence of the Company. See "Risk Factors."
MANAGEMENT
INVESTMENT ADVISER; COMPENSATION
Investment Adviser. United States Trust Company of New York and
U.S. Trust Company will serve as the co-investment Adviser (collectively
referred to herein as "U.S. Trust" or the "Investment Adviser") of the
Company pursuant to an investment advisory agreement with the Company (the
"Advisory Agreement"). The Investment Adviser has managed Fund I and Fund
II, each a registered BDC, since September 1994 and March 1997,
respectively.
Under the supervision of the Company's Board of Managers, the
Investment Adviser is responsible for finding, evaluating, structuring, and
monitoring the Company's investments. The investment professionals in
charge of the day-to-day management of the Company have extensive
experience in venture capital and private equity investing. See "Managers,
Officers and Investment Professionals" below.
U.S. Trust provides investment management, trust and banking
services to individuals, corporations and institutions. U.S. Trust is a
member bank of the Federal Reserve System and the Federal Deposit Insurance
Corporation and is one of the twelve members of the New York Clearing House
Association. On December 31, 1999, U.S. Trust's Asset Management Group had
approximately $86 billion in assets under management. The principal
business address of the Investment Adviser is 114 West 47th Street, New
York, New York 10036-1532. The Investment Adviser is a subsidiary of U.S.
Trust Corporation.
Management Fee. In return for its services and the expenses which
the Investment Adviser assumes under the Advisory Agreement, the Company
will pay the Investment Adviser, on a quarterly basis, an advisory fee
equal to 2.00% of net assets through the fifth anniversary of the first
closing date and 1.00% of net assets thereafter. The management fee is
payable in arrears on the last day of each calendar quarter. The Investment
Adviser has agreed to waive the Advisory Fee during the subscription
period, which will end on the final subscription date. See "The Company"
and "Regulation."
20
Advisory Agreement. The Company will enter into an investment
advisory agreement with the Investment Advisor. The Advisory Agreement
provides that the Investment Adviser shall, subject to the supervision of
the Board of Managers, identify, evaluate, structure, monitor and dispose
of the Company's investments.
Under the Advisory Agreement, the Company is obligated to bear all
costs and expenses directly allocable and identifiable to the Company or
its business or investments, including, but not limited to, fees of the
Board of Managers; fees of the Investment Adviser; expenses of registering
the Units under federal and state securities laws; interest; taxes; fees
and expenses of the Company's legal counsel and independent accountants;
fees and expenses of the transfer agent; expenses of printing and mailing
Units certificates, reports to members, notices to members and proxy
statements; reports to regulatory bodies; brokerage and other expenses in
connection with the execution, recording and settlement of portfolio
security transactions; expenses in connection with the acquisition and
disposition of portfolio securities or the registration of privately issued
portfolio securities; costs of third party evaluations or appraisals of the
Company (or its assets) or its actual investments; expenses of membership
in investment company associations; expenses of fidelity bonding and other
insurance premiums; expenses of members' meetings; commission and state
blue sky registration fees; fees payable to the National Association of
Securities Dealers, Inc. (the "NASD"), if any, in connection with this
offering; and the Company's other business and operating expenses.
The Advisory Agreement provides for indemnification by the Company
of the Investment Adviser from any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees and expenses)
not resulting from willful misfeasance, bad faith or gross negligence in
the performance by the Investment Adviser of its duties thereunder or the
reckless disregard of its obligations and duties under the Advisory
Agreement.
The Advisory Agreement provides that it shall continue in effect
for two years and that, after the initial period of effectiveness, it will
continue in effect for successive annual periods, provided that such
continuance is specifically approved at least annually by the vote of a
majority of the Board of Managers of the Company who are not parties to the
Advisory Agreement or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such continuance, and
either: (i) the vote of a majority of the outstanding Units of the Company;
or (ii) the vote of a majority of the full Board of Managers of the
Company. The Advisory Agreement also provides that it may be terminated at
any time, without the payment of any penalty, either by: (i) the Company,
by action of the Board of Managers or by vote of a majority of the
outstanding Units of the Company, on 60 days' written notice to the
Investment Adviser; or (ii) the Investment Adviser, on 90 days' written
notice to the Company. The Advisory Agreement will terminate immediately in
the event of its "assignment" (as defined in the Investment Company Act).
THE MANAGER
[UST Management LLC] serves as the Manager of the Company pursuant
to the Operating Agreement, subject to the supervision of the Board of
Managers. The Operating Agreement requires the Manager to provide, or
arrange suitable third parties to provide, any and all management and
administrative services reasonably necessary for the operation of the
Company and the conduct of its business. Such management and administrative
services include, without limitation, providing the Company with office
space, equipment, facilities and supplies and clerical services; keeping
and maintaining the books and records of the Company, administering capital
accounts and handling communications and correspondence with members,
preparing accounting, management and other reports; and providing such
other managerial and administrative services as may be reasonably requested
by the Company. The Manager also makes available personnel and services to
portfolio companies requiring managerial assistance.
The Manager is a recently organized limited liability company that
was created to provide management and administrative services to the
Company and to other investment funds that U.S. Trust may establish in the
future. The Investment Adviser is the managing member of the Manager.
Certain employees and officers of U.S. Trust and its affiliates are members
of the Manager and are allocated a portion of the Manager's net profits and
net losses. The principal business address of the Manager is 114 West 47th
Street, New York, New York 10036-1532.
Pursuant to the Operating Agreement, the Company maintains a
capital account for the Manager and makes certain allocations and
distributions to the Manager. See "Description of the Company - Allocations
and Distributions."
21
INVESTMENT OPERATIONS
The Investment Adviser will initiate, screen and monitor the
Company's investments.
Venture Capital Investments will typically be structured in
negotiated, private transactions directly with the issuer. The Company's
investments will generally consist of non-publicly traded equity and
equity-like securities, including common stock, preferred stock, limited
partnership interests, limited liability company interests, warrants and
convertible debentures, subject to certain regulatory and other
restrictions. In connection with most Company investments, the Investment
Adviser or the Manager will work with the portfolio company to develop and
implement the portfolio company's long-term strategy and to enhance its
value.
The Investment Committee of the Investment Adviser, which consists
of senior investment professionals of U.S. Trust, will make the final
investment decisions regarding any investment proposal made by the
Investment Adviser.
Deal Origination. Investment proposals may come to the attention
of the Investment Adviser from many sources including unsolicited proposals
from the public, personal contacts of the Investment Adviser or its
affiliates, other private equity investors and referrals from investment
banks, commercial banks, lawyers, accountants and other members of the
financial community, including U.S. Trust personnel. The Investment Adviser
believes that investment opportunities may also come from several venture
capital and private equity funds of which it or any of its affiliates may
be an investor. Under certain circumstances, such opportunities may require
prior exemptive relief from the Commission. See "Risk Factors --
Transactions with Affiliates; Potential Conflicts of Interest" and
"Regulation."
Evaluation of Investment Opportunities. Prior to committing funds
to an investment opportunity, a disciplined investment process is
undertaken which includes a legal, financial, tax, industry and company
due diligence investigation by the Investment Adviser to assess the
prospects and risks of the potential investment. The experience and
expertise of the officers of the Investment Adviser will be essential in
evaluating products, markets, industry trends, financial requirements,
competition and the management team associated with a prospective
investment. Each investment opportunity will need to be approved by the
Investment Committee of the Investment Adviser.
Structuring of Investments. The terms and conditions of the
investments acquired will result from negotiations directly with the
portfolio company or an affiliate thereof. The Investment Adviser will be
responsible for conducting such negotiations on behalf of the Company and
will seek to structure the terms of the investment to provide for the
capital needs and success of the issuer and at the same time to maximize
the Company's opportunity for long-term capital appreciation. An important
factor in successful private equity investing is proper structuring of the
transaction in terms of such matters as price, type of security,
restrictions on use of funds, commitments or rights to provide additional
financing, control and involvement in the issuer's business and liquidity.
Management Assistance and Monitoring of Investments. Successful
business development investing requires active monitoring and participation
and influence on major business decisions. Representatives of the Manager
and/or its affiliates will frequently serve as members of the board of
directors or advisory boards of portfolio companies or will have visitation
rights to those companies. Board representation, as well as a close working
relationship with the operating management, should enable the Company to
exercise influence and provide management assistance with respect to such
matters as capital structure, budgets, profit goals, diversification
strategy, financing requirements, management additions or replacements and
developing a public market for the securities of the portfolio companies.
The close tracking of internal financial statements and progress reports,
as well as an active working relationship with management, form the basis
of effective portfolio monitoring and risk management.
Liquidation of Investments. In order to realize the benefits of
capital appreciation, private equity investments must be liquidated. The
method and timing of the liquidation of investments are critical elements
to maximizing portfolio return. The Company expects to liquidate its
investments through a variety of transactions, including mergers,
negotiated sales of portfolio companies, sales in registered public
offerings, sales in the public markets of registered securities and
recapitalizations. In structuring the investments, the Investment Adviser
will endeavor to reach such understanding with the portfolio company or its
affiliates as may be appropriate as to the method and timing of liquidation
of the Company's investments and will usually seek to obtain registration
rights at the expense
22
of the issuer and reporting compliance for eligible companies under Rule
144 under the Securities Act. Timing of divestiture or liquidation depends
on the performance of the portfolio company, the ability of the portfolio
company to refinance its outstanding securities and other financial market
opportunities. See "Risk Factors -- Liquidity of Private Equity
Investments." The Company will bear the costs of liquidating investments to
the extent that such expenses are not paid by the issuer. The Company may
as an alternative to liquidating certain investments distribute such
investments in kind. Prior to liquidation of the Company, the Company
intends to distribute in kind only securities that may be resold without
registration under the Securities Act and for which an active trading
market exists. Such distributions may have benefits for investors,
including greater control over the timing of recognition of capital gains
for income tax purposes. Distributions in-kind also involve certain
expenses and risks. See "Risk Factors--Distributions of Securities In
Kind."
BACKGROUND
The following list includes all the private companies and private
funds in which Fund I and Fund II have invested as of January 31, 2000 and
as reported in their respective annual reports as filed with the
Commission. The list is intended to illustrate the types of investments
with which the Investment Adviser has had investment experience.
23
FUND II
EXCELSIOR PRIVATE EQUITY FUND II, INC. INVESTMENTS (AS OF 1/31/00)
------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Holding Cost Realized Unrealized Total
Period (Years) Basis Gain/(Loss) Gain/(Loss) Value
<S> <C> <C> <C> <C> <C>
DIRECT INVESTMENTS
Advantage Schools, Inc. 1.3 $ 4,606,980 $ - $ 4,540,257 9,147,237
Captura Software, Inc. 1.0 3,999,999 - - 3,999,999
Classroom Connect, Inc. 1.1 7,999,951 - 1,819,965 9,819,915
Constellar Corporation 1.8 6,999,995 - - 6,999,995
Conway Stuart Medical, Inc. 0.4 6,124,144 - - 6,124,144
ePod Corporation 0.1 1,000,000 - - 1,000,000
Killerbiz, Inc. 0.1 500,000 - - 500,000
Lifeminders.com, Inc.* 0.6 11,499,997 - 172,817,836 184,317,833
Managemark, Inc. 0.6 5,000,002 - - 5,000,002
MarketFirst Software, Inc. 0.4 4,999,543 - - 4,999,543
PowerSmart, Inc. 1.9 9,237,500 - 4,851,261 14,088,761
Protogene Laboratories, Inc. 0.1 6,000,000 - - 6,000,000
ReleaseNow.com, Inc. 1.4 6,810,039 - 2,646,106 9,456,145
Softcom Microsystems, Inc. 1.0 4,178,649 9,998,176 1,243,640 15,420,465
Survivalink Corporation 1.4 7,584,999 - - 7,584,999
WNP Communications, Inc. 0.8 5,877,855 13,338,275 - 19,216,130
Zeus Wireless, Inc. 0.1 5,000,001 - - 5,000,001
DIRECT INVESTMENT TOTALS 1.0 $ 97,419,653 $ 23,336,450 $187,919,065 $308,675,168
<CAPTION>
Capital Cost Realized Unrealized Total
Committed Basis** Gain/(Loss) Gain/(Loss) Value
<S> <C> <C> <C> <C> <C>
FUND INVESTMENTS
Advanced Technology Ventures V 3,000,000 1,575,000 - 979,751 2,554,751
Brand Equity Ventures 2,500,000 1,855,263 496,693 655,133 3,007,089
Brentwood Associates III 5,000,000 709,730 - 122,281 832,011
Broadview Capital Partners 5,000,000 1,000,000 - (76,370) 923,630
Commonwealth Capital Ventures II 4,000,000 2,300,000 - 536,383 2,836,383
Communications Ventures III 5,000,000 3,625,000 - 1,390,109 5,015,109
Friedman, Fleischer & Lowe 5,000,000 635,269 - (29,000) 606,269
Mayfield Fund X 5,000,000 2,250,000 - 35,934 2,285,934
Mid-Atlantic Ventures III 5,000,000 3,500,000 - 1,904,319 5,404,319
Morgenthaler Venture Partners V 8,000,000 4,400,000 - 880,423 5,280,423
Quad-C Partners V 5,000,000 2,118,156 - 40,513 2,158,669
Sevin Rosen Fund VI 2,500,000 1,600,000 - 1,265,417 2,865,417
Trinity Ventures VI 3,000,000 1,931,250 - 2,969,477 4,900,727
FUND INVESTMENT TOTALS $ 58,000,000 $ 27,499,668 $ 496,693 $ 10,674,370 $ 38,670,732
PORFOLIO TOTALS $124,919,322 $ 23,833,144 $198,593,435 $347,345,900
*No illiquidity discount has been assigned to the Fund's position.
** Fund Investment Cost Basis includes adjustments made for LP distributions.
</TABLE>
24
INVESTMENTS LIQUIDATED (AS OF JANUARY 31, 2000)
Softcom Microsystems, Inc., Fremont, CA ("Softcom")
Initial Investment Date: August 1998
Total Investment: $4.2 million
Total Proceeds:* $15.4 million
Softcom 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. Softcom was sold in
August 1999 to Intel.
*10% of proceeds remain unrealized due to escrow holdback as part
of the Intel acquisition
WNP Communications, Inc., Reston, VA ("WNP")
Initial Investment Date: January 1998
Total Investment: $5.9 million
Total Proceeds: $19.2 million
WNP acquired broadband spectrum covering 30 of the top 50 markets
in the United States in the Local Multipoint Distribution Services
("LMDS") auction conducted by the FCC in 1998. Subsequently, the
company was acquired in May 1999 by NextLink, a publicly traded
wireless communication services provider, for cash and stock.
PUBLIC COMPANIES (AS OF JANUARY 31, 2000)
LifeMinders.com, Inc., Herndon, VA ("LifeMinders.com")
Initial Investment Date: February 1999
Total Investment: $11.5 million
Total Investment Value:* $184.3 million
LifeMinders.com is an online direct marketing company that
provides personalized information, or content, 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. As of January 31, 2000, the
company has approximately 8 million members and numerous
advertising partners. LifeMinders.com has experienced significant
membership growth since our initial investment in February 1999,
when the company had less than 50,000 members. LifeMinders.com
recently held its initial public offering in November 1999
(NASDAQ:LFMN). Fund II has invested $11.5 million in
Lifeminders.com at an average cost of $2.70 per share and the
company's stock, as of January 31, 2000, was trading at $43.25 per
share.
*Does not assign an illiquidity discount to the Fund's position.
PRIVATE COMPANIES (AS OF JANUARY 31, 2000)
Advantage Schools, Inc., Boston, MA ("Advantage")
Initial Investment Date: June 1998
Total Investment: $4.6 million
Investment Carrying Value: $9.1 million
Advantage is an education management organization which manages
public charter schools on a for-profit basis. Advantage manages
charter schools in urban school districts in cooperation with
local partners. Its schools are publicly funded, receiving
per-student capitation rates generally consistent with those
received by other schools in the district. Founded in 1996,
Advantage currently manages 16 schools across the country.
25
Captura Software, Inc., Bothell, WA ("Captura")
Initial Investment Date: February 1999
Total Investment: $4.0 million
Investment Carrying Value: $4.0 million
Captura is an e-finance application services provider developing
and marketing expense management software and 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.
Captura's customer base includes General Motors, Ford, Compaq and
Aetna.
Classroom Connect, Foster City, CA ("Classroom Connect")
Initial Investment Date: September 1998
Total Investment: $8.0 million
Investment Carrying Value: $9.8 million
Classroom Connect, is a provider of educational Internet products
to students in the kindergarten to eighth grade market. The
company offers products and services, including proprietary
instruction guides, teaching plans, seminars, and unique Internet
content via electronic commerce and direct mail, to teachers and
school districts wishing to incorporate the Internet into the
classroom.
Constellar Corporation, Redwood Shores, CA ("Constellar")
Initial Investment Date: April 1998
Total Investment: $7.0 million
Investment Carrying Value: $7.0 million
Constellar is a provider of enterprise application integration
software and services to large organizations in North America,
Europe and Australia. Constellar provides products and services
that work to untangle complex information technology environments
by managing data, making it accessible, and moving it across
several different applications. Constellar's customer list
includes Sprint, British Telecom, Deutsche Bank, NatWest,
Princeton University, London Stock Exchange, and General Electric.
Conway-Stuart Medical, Inc., Sunnyvale, CA ("Conway-Stuart")
Initial Investment Date: December 1999
Total Investment: $6.1 million
Investment Carrying Value: $6.1 million
Conway-Stuart develops and markets medical devices for the
treatment of gastrointestinal diseases using radio frequency
delivered through a catheter. Conway-Stuart had developed a
product targeting gastroesophageal reflux disease that is
undergoing the Food and Drug Administration 510(k)-clearance
process.
ePod Corporation, New York, NY ("ePod")
Initial Investment Date: December 1999
Total Investment: $1.0 million
Investment Carrying Value: $1.0 million
ePod provides distributed e-commerce, content syndication and
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 through which companies can
promote and sell products by packaging and distributing content
and merchandise through commerce-enabled showcases called ePods.
KillerBiz, Inc., Fremont, CA ("KillerBiz")
Initial Investment Date: December 1999
Total Investment: $0.5 million
Investment Carrying Value: $0.5 million
26
KillerBiz is an online business-to-business marketplace connecting
small businesses to service providers. The company is dedicated to
lowering the time and costs associated with services procurement,
while providing sellers with a cost effective means to access and
respond to qualified sales leads through a "request-for-quote" or
"request-for-proposal" engine. The KillerBiz web site offers a
business-to-business marketplace that leverages both Extensible
Mark-up Language and patent-pending Intelligent Trained Agent
technology.
MarketFirst Software, Inc., Mountain View, CA ("MarketFirst")
Initial Investment Date: August 1999
Total Investment: $5.0 million
Investment Carrying Value: $5.0 million
MarketFirst is a developer and marketer of 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.
Managemark, Inc., Sunnyvale, CA ("Managemark")
Initial Investment Date: June 1999
Total Investment: $5.0 million
Investment Carrying Value: $5.0 million
Managemark is an Internet application software company focused on
developing finance and administration software and services to
small and middle-market firms. The company's current offerings are
focused on increasing the efficiency and lowering the cost of
processing corporate expenses.
PowerSmart, Inc., Shelton, CT ("PowerSmart")
Initial Investment Date: January 1998
Total Investment: $9.2 million
Investment carrying Value: $14.1 million
PowerSmart 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 industrial 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., Menlo Park, CA ("Protogene")
Initial Investment Date: December 1999
Total Investment $6.0 million
Investment Carrying Value: $6.0 million
Protogene 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.com, Menlo Park, CA ("ReleaseNow")
Initial Investment Date: June 1998
Total Investment: $6.8 million
Investment Carrying Value: $9.5 million
ReleaseNow is an outsourced provider of e-commerce services for
vendors and resellers of software and other digital goods. The
company builds and manages e-commerce solutions that enable
customers to market, sell and deliver software online. ReleaseNow
provides software publishers, software resellers, and
content-driven web sites with technology and services to establish
an Internet-based sales and distribution channel. ReleaseNow filed
its S-1 for Initial Public Offering on January 28, 1999.
27
SurVivaLink Corporation, Minnetonka, MN ("SurVivaLink")
Initial Investment Date: August 1998
Total Investment: $7.6 million
Investment Carrying Value: $7.6 million
SurVivaLink designs, develops and markets automated external
defibrillators ("AEDs"), which are portable, emergency medical
devices that deliver electrical shocks to resuscitate victims of
cardiac arrest. SurVivaLink's AEDs are small, lightweight and easy
to use, making them suitable for law enforcement personnel,
firefighters and paramedics. To date, SurVivaLink estimates that
its AEDs have been responsible for saving over 250 lives.
Zeus Wireless, Inc., Columbia, MD ("Zeus")
Initial Investment Date: December 1999
Total Investment: $5.0 million
Investment Carrying Value: $5.0 million
Zeus 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 an equivalent price.
SUBSEQUENT INVESTMENTS
firstsource.com, Inc., Santa Ana, CA ("firstsource")
Initial Investment Date: February 2000
Total Investment: $10.0 million
Investment Value: $10.0 million
firstsource is a provider of business products, services and
online business procurement solutions for small and medium sized
business. With approximately 250,000 Store Keeping Units and
numerous different service providers, the firstsource.com web site
allows customers to search, compare, price, and buy products and
services directly from multiple distributors' inventories.
MySeasons.com, Inc., New York, NY ("MySeasons")
Initial Investment Date: February 2000
Total Investment: $2.0 million
Investment Value: $2.0 million
MySeasons is a business-to-cusumer 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. MySeasons is a newly capitalized entity
and represents the internet initiative of Foster & Gallagher, a
direct mail company and the largest non-store horticulture
retailer in the United States.
28
PRIVATE FUNDS
Advanced Technology Ventures V, LP ("ATV V")
Fund Size: $175 million
Investment commitment: $3 million
ATV V is an early-stage focused fund targeting information
technology and health care markets. Since 1979, ATV has invested
in and worked with over 100 emerging companies, including Actel,
Berkeley Networks, Cadence Design Systems, Epigram and VLSI
Technology.
Brand Equity Ventures I, LP ("BEV")
Fund Size: $95 million
Investment commitment: $2.5 million
BEV is focused on investing broadly across the consumer sector,
particularly in branded opportunities within e-commerce,
retailing, direct response and other consumer services. To date,
the fund has made distributions resulting from investments in
Alloy Online and Outpost.com.
Brentwood Associates III, LP ("Brentwood III")
Fund Size: $360 million
Investment commitment: $5 million
Brentwood III is focused on middle-market buyouts and
consolidations. Brentwood III's strategy is to identify industries
with consolidation characteristics, develop a strategy for
implementation, and recruit management to execute that strategy.
Brentwood was an investor in Rental Services and is an investor in
Classroom Connect, companies in which Fund I and Fund II,
respectively, have invested. Brentwood Associates II is a Fund I
holding.
Broadview Capital I LP ("Broadview")
Fund Size: $220 million
Investment commitment: $5 million
Broadview is focused on buyouts and other recapitalizations within
the technology sector. The fund is sponsored by Broadview
International LLC, a leading technology mergers and acquisitions
focused investment banking firm. To date, Broadview International
has advised on mergers and acquisitions for companies such as
Nokia, Fore Systems, Lycos and BMC Software and will be able to
provide Broadview Capital with substantial resources to make its
investments.
Commonwealth Capital Ventures II, LP ("Commonwealth II")
Fund Size: $80 million
Investment commitment: $4 million
Commonwealth II makes investments in early to later-stage
information technology companies in the New England region.
Commonwealth II maintains a particular focus on communications
technology, Internet software and services and e-commerce
companies. Commonwealth has been an investor in Altiga Networks,
Direct Hit Technologies and Smarterkids.com.
Communications Ventures III, LP ("Communications Ventures III")
Fund Size: $125 million
Investment commitment: $5 million
Communications Ventures III invests exclusively in the
communications sector, targeting early stage companies. As
investors, the principals of Communications Ventures III have
played roles in the formation of many companies in the
communications industry, including Advanced Fibre Communications,
Ascend, Broadcom, Ciena, Copper Mountain, Digital Microwave,
Digital Island, Intecom, MCI, Newbridge, Octel, PairGain,
Paradyne, Tellabs, Tut Systems and 3Com.
29
Friedman, Fleischer & Lowe, LP ("Freidman, Fleischer & Lowe")
Fund Size: $325 million
Investment commitment: $5 million
Freidman, Fleischer & Lowe is a first-time fund focused
exclusively on participation in middle-market buyouts. The
principals of Freidman, Fleischer & Lowe have been involved in a
number of buyout transactions including Young & Rubicam,
Levi-Strauss, Hoyts and Western Wireless.
Mayfield Fund X, LP ("Mayfield X")
Fund Size: $450 million
Investment commitment: $5 million
Mayfield X is focused on early stage information technology and
healthcare investments, primarily located in Silicon Valley, CA.
Founded in 1969, Mayfield has raised over $1 billion in nine
venture funds and invested in over 340 high-growth companies.
Among their investments are 3COM, Compaq, Immunex, Silicon
Graphics, Citrix Systems, and Legato.
Mid-Atlantic Venture Fund III, LP ("MAVF III")
Fund Size: $60 million
Investment commitment: $5 million
MAVF III invests in early and expansion stage technology companies
in the Mid-Atlantic region. The principals of MAVF III have
significant investment experience and have established over the
years a presence within the investment community in the
Mid-Atlantic region. The principals of MAVF III have been
investors in Visual Networks and Net2000 Communications.
Morgenthaler Venture Partners V, LP ("MVP V")
Fund Size: $300 million
Investment commitment: $8 million
MVP V is an early stage venture fund, investing primarily in
information technology and healthcare companies as well as buyouts
of basic businesses. The fund's principals have been involved with
successful venture capital investments in Apple Computer,
Synopsys, Atria Software, Premysis Software and CardioThoracic.
Morgenthaler Venture Partners IV is a Fund I holding.
Quad-C Partners V, LP ("Quad-C")
Fund Size: $300 million
Investment commitment: $5 million
Quad-C is focused on taking control positions in leveraged
acquisitions and recapitalizations of middle-market companies.
Quad-C's principals have significant operating and financial
experience and have made investments across industries such as
restaurants, banking, automotive logistics and media.
Sevin Rosen VI, LP ("Sevin Rosen VI")
Fund Size: $165 million
Investment commitment: $2.5 million
Sevin Rosen VI 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. The principals at Sevin Rosen
Funds have a track record that includes being early investors in
Compaq, Lotus, Cyrix, Citrix, and Ciena. Sevin Rosen Fund V is a
Fund I holding.
30
Trinity Ventures VI, LP ("Trinity VI")
Fund Size: $140 million
Investment commitment: $3 million
Trinity VI is focused on investing in early to late-stage
companies in the software, communications and electronic commerce sectors.
The principals of Trinity VI have been involved with numerous successful
investments, including SciQuest, NextCard, Quokka Sports, Starbucks and
Fatbrain.com.
31
FUND I
UST PRIVATE EQUITY INVESTORS FUND, INC. INVESTMENTS (AS OF 1/31/00)
--------------------------------------------------------------------
<TABLE>
<CAPTION>
Average Holding Cost Realized Unrealized Total
Period (Years) Basis Gain/(Loss) Gain/(Loss) Value
<S> <C> <C> <C> <C> <C>
DIRECT INVESTMENTS
Rental Services Corporation 1.7 $ 985,000 $ 2,086,479 $ - $ 3,071,479
Corsair Communications, Inc. 3.1 3,000,003 751,259 329,370 4,080,631
CommSite International, Inc. 2.6 2,718,750 - - 2,718,750
Quicklogic Corporation* 3.2 3,000,000 - 3,465,525 6,465,525
Signius Corporation 3.0 3,418,146 - (3,418,146) -
Cardiopulmonary Corporation 3.1 2,150,000 - (2,150,000) -
Best Friends Pet Care, Inc. 2.8 3,525,000 - - 3,525,000
Abtox, Inc. 2.8 2,800,001 - (2,800,001) -
LogicVision, Inc. 2.2 1,549,499 - 106,208 1,655,707
The Party Experience, Inc. 1.4 2,055,206 (2,055,206) - -
P2 Holdings/Plynex Corporation 1.2 2,750,000 (2,750,000) - -
NeoVista Software, Inc.* 2.0 1,038,488 - 2,081,601 3,120,089
DIRECT INVESTMENTS TOTALS 2.5 $ 28,990,092 $ (1,967,468) $(2,385,444) $ 24,637,181
<CAPTION>
Committed Cost Realized Unrealized Total
Capital Basis** Gain/(Loss) Gain/(Loss) Value
<S> <C> <C> <C> <C> <C>
FUND INVESTMENTS
Allegra Capital Partners III 2,000,000 1,560,000 - 1,916,018 3,476,018
Brentwood Associates II 2,000,000 1,625,284 158,388 157,224 1,940,896
Bruckmann, Rosser, Sherrill 2,000,000 1,845,813 152,242 401,063 2,399,118
Morgenthaler Ventures IV 2,000,000 1,546,595 667,644 472,895 2,687,134
Sevin Rosen Fund V 2,000,000 1,743,748 1,654,983 1,033,574 4,432,305
Vanguard V 2,000,000 1,916,101 1,011,993 9,192,272 12,120,366
FUND INVESTMENT TOTALS $12,000,000 $ 10,237,539 $ 3,645,250 $ 13,173,047 $ 27,055,837
PORTFOLIO TOTALS $ 39,227,632 $ 1,677,782 $10,787,604 $ 51,693,018
* No illiquidity discount has been assigned to the Fund's position.
** Fund Investment Cost Basis includes adjustments made for LP distributions.
</TABLE>
INVESTMENTS LIQUIDATED
CommSite International, Inc., Vienna, VA ("CommSite")
Initial Investment Date: April 1996
Total Investment: $2.7 million
Total Proceeds:* $2.7 million
* Total proceeds include estimate of additional milestone payment
to CommSite from American Tower.
CommSite is a provider of wireless towers and construction
services. On May 13, 1999, American Tower Corporation, a publicly
traded company, acquired CommSite.
32
Rental Service Corp., Scottsdale, AZ ("Rental Service")
Initial Investment Date: January 1996
Total Investment: $1.0 million
Total Proceeds: $3.1 million
Rental Service is a consolidator of heavy equipment rental
businesses and an outsourced provider of heavy equipment. The Company had its
initial public offering in September 1996 and was subsequently acquired by
Atlas, Copco North America in July 1999.
PUBLIC COMPANIES
Corsair Communications, Inc., Palo Alto, CA. ("Corsair")
Initial Investment Date: October 1996
Total Investment: $3.0 million
Total Investment Value: $4.1 million
Corsair (NASDAQ: CAIR) is a wireless communication infrastructure
company providing pre-paid wireless handset and fraud detection
software and services.
NeoVista Software, Inc., Cupertino, CA ("Neovista")
Initial Investment Date: June 1997
Total Investment: $1.0 million
Total Investment Value:* $3.1 million
NeoVista develops data mining software and applications related to
customer relationship management. Data mining allows companies to
discover non-obvious relationships by applying various algorithms
to data stored in databases and data warehouses. Data mining has
been used for inventory management, customer profiling, behavior
prediction and fraud detection. In January 2000, Accrue Software
("Accrue"; NASDAQ: ACRU) acquired NeoVista in exchange for 2.4
million shares of Accrue stock.
QuickLogic Corporation, Sunnyvale, CA ("QuickLogic")
Initial Investment Date: November 1996
Total Investment: $3.0 million
Total Investment Value:* $6.5 million
QuickLogic (NASDAQ: QUIK) designs, manufactures and markets
high-capacity programmable logic semiconductors, known as field
programmable gate arrays, along with comprehensive design
software. The company's products shorten the design cycle time for
electronic systems and accelerate time-to-market. QuickLogic's new
class of devices, embedded standard products, facilitate extremely
fast development of complex systems.
*Does not assign an illiquidity discount to the Fund's position.
PRIVATE COMPANIES
Best Friends Pet Care, Inc., Norwalk, CT ("Best Friends")
Initial Investment Date: December 1996
Total Investment: $3.5 million
Total Investment Value: $3.5 million
Best Friends is the largest operator of pet kennels in the United
States. The company's facilities offer a wide range of pet
services including boarding, grooming and training.
33
LogicVision, Inc., San Jose, CA ("LogicVision")
Initial Investment Date: May 1997
Total Investment: $1.5 million
Total Investment Value: $1.7 million
LogicVision is a developer of built-in semiconductor testing
technologies used in semiconductor design, testing and
manufacture. As semiconductors become more complex (i.e. large
systems reduced to a customized chip), the need to adopt new
testing technology has become critical. LogicVision's customers
include Sun Microsystems, Cisco Systems, NCR Corp., Hitachi and
Hughes.
PRIVATE FUNDS
Allegra Partners III, LP ("Allegra III")
Fund Size: $40 million
Investment commitment: $2.0 million
Allegra III is a later stage focused venture fund based in New
York City. Allegra III invests primarily in companies in the
telecommunications, software and service industries with
"Internet-driven" strategies. Allegra's principals have been
investors in Autotote, Axent Technologies, Business Evolution and
Viasoft.
Brentwood Associates Buyout Fund II, LP ("Brentwood II")
Fund Size: $240 million
Investment commitment: $2.0 million
Brentwood II is focused on middle-market buyouts and
consolidations. Brentwood II's strategy is to identify industries
with consolidation characteristics, develop a strategy for
implementation and recruit management to execute that strategy.
Brentwood was an investor in Rental Services and is an investor in
Classroom Connect, companies in which Fund I and Fund II,
respectively, have invested. Brentwood III is a Fund II holding.
Bruckmann, Rosser, Sherrill & Co., LP ("BRS")
Fund Size: $375 million
Investment commitment: $2.0 million
BRS is a leveraged buyout fund based in New York. The firm's
portfolio contains investments ranging from Restaurant Associates,
a restaurant operator and food service contractor, to Doane Pet
Care Enterprises, a manufacturer and distributor of pet food.
Morgenthaler Venture Partners IV, LP ("MVP IV")
Fund Size: $135 million
Investment commitment: $2.0 million
MVP IV is an early stage venture fund, investing primarily in
information technology and healthcare companies as well as buyouts
of basic businesses. The fund's principals have been involved with
successful venture capital investments in Apple Computer,
Synopsys, Atria Software, Premysis Software and CardioThoracic. To
date, Fund I has received from MVP IV shares of Nortel, Microsoft,
Guidant, as well as several cash distributions. Morgenthaler
Venture Partners V is a Fund II holding.
Sevin Rosen Fund V, LP ("Sevin Rosen V")
Fund Size: $160 million
Investment commitment: $2.0 million
34
Sevin Rosen V 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. The principals at Sevin Rosen
Funds have a track record that includes being early investors in
Compaq, Lotus, Cyrix, Citrix, and Ciena. To date, this fund has
made distributions of stock including Ciena, Pure Atria Software
and Cisco Systems. Sevin Rosen Fund VI is a Fund II holding.
Vanguard Venture Partners V, LP ("Vanguard V")
Fund Size: $55 million
Investment commitment: $2.0 million
Vanguard V is an early-stage fund investing in information
technology and healthcare. Among the principals' previous
successful investments are Ciena, Advanced Fibre Communications
and Network Appliances. The fund has distributed shares of Cisco
Systems and currently holds Cobalt Networks, Image X, and Digital
Island.
INVESTMENTS WRITTEN-OFF
AbTox, Inc., Mundelein, IL ("AbTox")
Initial Investment Date: March 1997
Total Investment: $2.8 million
Total Investment Value: $0
AbTox is a manufacturer of gas plasma sterilizers, which has filed
for bankruptcy due to operating problems arising from regulatory
issues related to one of its products.
Cardiopulmonary Corporation, Milford, CT ("Cardiopulmonary
Corporation")
Initial Investment Date: November 1996
Total Investment: $2.2 million
Total Investment Value: $0
Cardiopulmonary Corporation is a manufacturer of a smart
ventilator used in the acute and sub-acute hospital market that
adapts to patients' changing breathing patterns. The Fund's
position has been written down pursuant to a recent
recapitalization of the company.
P2 Holdings Corp. (formerly known as Plynetic Express), San
Leandro, CA ("P2 Holdings")
Initial Investment Date: June 1997
Total Investment: $2.8 million
Total Investment Value: $0
P2 Holdings was a provider of rapid prototyping and rapid tooling
services. The Fund wrote off its investment as the company filed
for bankruptcy in 1998.
Party Stores Holdings, Inc., Melville, NY ("Party Stores")
Initial Investment Date: May 1997
Total Investment: $2.1 million
Total Investment Value: $0
Party Stores operated the Party Experience, the Paperama and Paper
Cutter retail stores. The company filed for bankruptcy in 1998.
The Fund's $2.1 million investment was written off as the company
filed for bankruptcy.
Signius Corp. (formerly known as ProCommunications Corp.),
Somerset, NJ ("Signius")
Initial Investment Date: September 1996
Total Investment: $3.4 million
Total Investment Value: $0
35
Signius provides telemessaging services for small and medium-sized
businesses. The Fund's investment has been written down to zero to
reflect the operating status of the company.
THE FOREGOING INFORMATION WITH RESPECT TO FUND I AND FUND II IS
PRESENTED TO ILLUSTRATE THE TYPES OF INVESTMENTS THAT THE INVESTMENT
ADVISER HAS EXPERIENCE WITH IN THE BDC CONTEXT AND TO SHOW THE POTENTIAL
ECONOMIC BENEFITS AND RISKS INHERENT IN MAKING SUCH INVESTMENTS. THE
INFORMATION SHOWN SHOULD NOT BE CONSIDERED TO BE REPRESENTATIVE OF THE
INVESTMENTS THAT THE COMPANY WILL MAKE OR THE GAINS OR LOSSES IT WILL
EXPERIENCE ON ITS INVESTMENTS. PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS. THE INFORMATION SET FORTH ABOVE REPRESENTS
ACTUAL COST AND REALIZED AND UNREALIZED GAIN AND LOSS FOR EACH INDIVIDUAL
INVESTMENT MADE BY FUND I AND FUND II, OTHER THAN SHORT-TERM INVESTMENTS.
FUND I AND FUND II EXPERIENCED COSTS AND EXPENSES IN MAKING SUCH
INVESTMENTS, MONITORING SUCH INVESTMENTS AND, WHERE APPLICABLE, DISPOSING
OF SUCH INVESTMENTS. ADDITIONAL COSTS WILL BE EXPERIENCED ON THE
DISPOSITION OF INVESTMENTS NOT YET DISPOSED OF. UNREALIZED GAIN AND LOSS
AMOUNTS ARE BASED ON THE INVESTMENT ADVISER'S DETERMINATION OF THE CURRENT
VALUE OF THE INVESTMENTS, WHICH DETERMINATION ORDINARILY INVOLVES A HIGH
DEGREE OF JUDGMENT AND SUBJECTIVITY. UPON DISPOSITION, FUND I AND FUND II
MAY REALIZE MORE OR LESS THAN THE INVESTMENT ADVISOR'S ASSIGNED VALUATION.
IN ADDITION, FUND I AND FUND II ARE SUBJECT TO INVESTMENT MANAGEMENT FEES,
INCENTIVE FEES AND ONGOING OPERATING EXPENSES, NONE OF WHICH ARE REFLECTED
IN THE FOREGOING INFORMATION. FUND I AND FUND II ALSO MAINTAINED
SUBSTANTIAL HOLDINGS OF SHORT-TERM INVESTMENTS PENDING INVESTMENT IN THE
ABOVE LISTED INVESTMENTS. ACCORDINGLY, THE FOREGOING INFORMATION IS NOT
INDICATIVE OF THE ACTUAL RETURNS EXPERIENCED BY INVESTORS IN FUND I AND
FUND II.
Set forth below are the performance figures for Fund I and Fund II
for the periods shown, calculated in conformity with the standardized
performance methodology required by the Commission.
<TABLE>
<CAPTION>
1-Year 3-Year 5-Year 10-Year
<S> <C> <C> <C> <C>
UST Private Equity Investors Fund, Inc. 26.9% 6.4% N/A N/A
Excelsior Private Equity Fund II, Inc. 81.6% N/A N/A N/A
</TABLE>
CODE OF ETHICS
The Company and the Investment Adviser have adopted a code of
ethics under Rule 17j-1 of the Investment Company Act which restricts the
personal securities transactions of certain of the officers, employees,
directors, and Board of Managers members of the Company, the Manager and
the Investment Adviser. Its primary purpose is to ensure that personal
trading by U.S. Trust employees does not disadvantage the Company, U.S.
Trust portfolio managers and other investment personnel who comply with the
code of ethics' preclearance and disclosure procedures may be permitted to
purchase, sell or hold certain types of securities which also may be
purchased or sold by or are held in the fund(s) they advise. The code of
ethics can be reviewed and copied at the Commission's Public Reference Room
in Washington, D.C. Information on the Public Reference Room can be
obtained by calling the Commission at 1-202-942-8090. The code of ethics
is also available on the EDGAR Database on the Commission's Internet site
at http://www.sec.gov or may be obtained after paying a duplicate fee, by
electronic request to the following E-mail address: [email protected] or
by writing the Commission's Public Reference Section, Washington, D.C.
20549-0102.
BOARD OF MANAGERS, OFFICERS AND INVESTMENT PROFESSIONALS
Pursuant to the Operating Agreement, the business and affairs of
the Company will be managed under the direction of its Board of Managers.
The following are descriptions of the members of the Board of Managers and
the officers of the Company as well as of key employees of the Investment
Adviser and the Manager, including the members of its Investment Committee.
Unless otherwise noted, each member of the Management's Investment
Committee has been an employee of the Manager for at least the previous
five years and the business address of each individual listed below is 114
West 47th Street, New York, New York, 10036.
Board of Managers
David I. Fann, Douglas A. Lindgren and James F.
Dorment are the initial members of the Board of
Managers and it is expected that they will resign
their positions as such prior to the commencement of
operation of the Company and that a new Board of
Managers will be constituted.
36
The biographical information for David I. Fann,
Douglas A. Lindgren and James F. Dorment is set forth
below.
Officers of the Company
David I. Fann, (36), Co-Chief Executive Officer and
President of the Company and Managing Director of
U.S. Trust of New York. Mr. Fann serves as President
and Chief Executive Officer of Excelsior Private
Equity Investors Fund II, Inc. and UST Private Equity
Investors Fund, Inc. He is focused on direct
investments in healthcare, consumer services, and
e-commerce. Prior to joining U.S. Trust in April of
1994, Mr. Fann served in various capacities for
Citibank from 1986 through 1994, including, as a Vice
President of Citibank and its small business
investment company subsidiary, Citicorp Venture
Capital Ltd. from 1991 until 1994. While at Citicorp
Venture Capital Ltd., Mr. Fann invested in buyout and
venture capital transactions and venture capital
funds and served on the Board of Directors of several
of its portfolio companies. Mr. Fann holds a B.A.S.
degree in industrial engineering and economics from
Stanford University. Mr. Fann serves on the United
States Trust Company of New York Portfolio Policy
Committee, Strategy Review Committee, and the Special
Fiduciary Committee. Mr. Fann is on the Board of the
Somerset Exchange Fund, Classroom Connect, Inc.,
Conway Stuart Medical, Inc., SurVivaLink Corp. and
Protogene Laboratories, Inc.
Douglas A. Lindgren, (38), Co-Chief Executive Officer
and Chief Investment Officer of the Company and
Managing Director of U.S. Trust of New York. Mr.
Lindgren is Chief Investment Officer of the Excelsior
Private Equity Fund II, Inc. and Executive Vice
President of the UST Private Equity Investors Fund,
Inc. He is focused on direct investments in
information technology, Internet services, and
communications. Prior to joining U.S. Trust in April
1995, Mr. Lindgren served in various capacities for
Inco Venture Capital Management ("IVCM") from January
1988 through March of 1995, including President and
Managing Principal from January 1993 through March of
1995. While at IVCM, Mr. Lindgren invested in venture
capital and buyout transactions and served on the
board of directors of several of its portfolio
companies. Before joining IVCM, Mr. Lindgren was
employed by Salomon Brothers Inc and Smith Barney,
Harris Upham & Co., Inc. He is an Adjunct Professor
of Finance at Columbia University's Graduate School
of Business, where he has taught courses on venture
capital since 1993. Mr. Lindgren holds a M.B.A. and
B.A. from Columbia University. He serves on the
United States Trust Company of New York Portfolio
Policy Committee. Mr. Lindgren is on the Board of
Powersmart Inc., MarketFirst Software, Inc.,
Managemark, Inc., Constellar Corporation,
ReleaseNow.com, Inc., Lifeminders.com, Inc., Zeus
Wireless, Inc. and firstsource.
Lee A. Gardella, (32), Vice President of the Company
and Vice President of U.S. Trust NY, joined U.S.
Trust of New York in September 1997. He is focused on
direct investments in information technology
companies and on fund investments. Mr. Gardella
currently has monitoring responsibilities for several
portfolio companies including Captura Software, Inc.
and LogicVision, Inc. From July 1994 to September
1997, Mr. Gardella held several positions with the
Edison Venture Fund, an expansion stage venture
capital firm in Lawrenceville, NJ. In addition, Mr.
Gardella has worked at Wilshire Associates and
National Steel Corporation. Mr. Gardella has served
as a Director of the Greater Philadelphia Venture
Group. He received an MBA from the University of
Notre Dame and BSBA in Finance from Shippensburg
University. Mr. Gardella is a Chartered Financial
Analyst.
James F. Rorer, (30), Vice President of the Company
and U.S. Trust of New York Mr. Rorer is focused on
direct investments in healthcare, consumer services,
and e-commerce. Prior to joining US Trust in May
1999, he worked at Bain & Company ("Bain"), a leading
global strategic consulting firm, from 1996 until
April 1999. He was a consultant in the Private Equity
Practice, which provides strategic due diligence
services to large leveraged buyout firms. In
addition, Mr. Rorer also spent time in Bain's
standard consulting practice, working with companies
on a variety of strategic issues in a number of
different industries including automotive, electric
power, telecommunications, consumer products and
financial services. Mr. Rorer was
37
an investment banking analyst at CS First Boston from
1992 to 1994, where he worked on mergers and
acquisitions and financing for banks and consumer
finance companies. Mr. Rorer graduated from Duke
University, Phi Beta Kappa, with a degree in
economics and mathematics. He holds an MBA from
Harvard Business School.
James F. Dorment, (26), Chief Administrative Officer
of the Company and Assistant Vice President of U.S.
Trust of New York has been with the Private Equity
Division of U.S. Trust of New York since December
1997. Mr. Dorment is involved in all areas of
investment analysis and decision-making. From August
1995 through November 1997, he worked in the wealth
management division of U.S. Trust. Mr. Dorment
graduated from Bates College with a Bachelor of Arts
degree in economics. He is a Chartered Financial
Analyst and a member of the New York Society of
Security Analysts and the Association for Investment
Management and Research.
Ronald A. Schwartz, (51), Corporate Secretary. Mr.
Schwartz is Vice President and Assistant General
Counsel of U.S. Trust of New York. Prior to joining
U.S. Trust in 1991, Mr. Schwartz was associated with
the firm of Walter, Conston, Alexander & Green from
1985 through 1990, with a focus on securities law as
well as mergers and acquisitions. Mr. Schwartz
received a BA and an MA degree from the University of
California at Berkeley, and a JD from Boalt Hall,
University of California.
Brian F. Schmidt, (41), Chief Financial Officer of
the Company and Senior Vice President at US Trust.
Mr. Schmidt is the Chief Financial Officer of
Excelsior Private Equity Investors Fund II, Inc. and
UST Private Equity Investors Fund, Inc. He is the
Division Manager of Mutual Funds with an affiliate of
U.S. Trust. He is responsible for the operation and
administration of the Excelsior Family of Funds and
the U.S. Trust Common Trust Funds. Mr. Schmidt joined
U.S. Trust in 1991 from Prudential Insurance Company
of America, where he was Director of Accounting.
Prior to that he was a senior accounting manager at
Dreyfus Corporation. Mr. Schmidt has 16 years of
experience in financial services, concentrating in
mutual funds. He received his BS degree from Marist
College. He is on the accountant's and treasurer's
committee of the Investment Company Institute.
Frank D. Bruno, (40), Treasurer of the Company. Mr.
Bruno is a Vice President in the Mutual Funds
Administration Department of an affiliate of U.S.
Trust. Prior to joining U.S. Trust, he worked for the
Dreyfus Corporation and Price Waterhouse. Mr. Bruno
received his BS degree from The Pennsylvania State
University.
Investment Committee of the Investment Adviser
Frederick B. Taylor, (58), Chairman of the Investment
Committee. Mr. Taylor is Vice Chairman and Chief
Investment Officer of U.S. Trust NY and is a member
of the Board of Directors and Chairman of the
Portfolio Policy Committee. He has been with U.S.
Trust for over 30 years, and has been responsible for
developing and implementing the current investment
policy since 1981. Mr. Taylor received his B.A.
degree from Wesleyan University, with distinction,
and his M.B.A. degree from the University of
Pennsylvania, Wharton School. He is a member of the
New York Society of Security Analysts and the
Association for Investment Management and Research.
Paul K. Napoli, (54), Co-Chairman of the Investment
Committee. Mr. Napoli is an Executive Vice President
and is responsible for the Personal Wealth Management
Group. He is a member of the Management Committee,
the Risk Policy Committee, the Trust Committee, the
Broker Relations Committee and Derivatives Committee.
Mr. Napoli received his undergraduate degree in
Economics and Mathematics from Boston College and his
M.B.A. in Finance and Economics from Columbia
University. He holds the designation of Chartered
Financial Analyst and Certified Trust & Financial
Advisor. Mr. Napoli is a member of the New York
Society of Security Analysts, and the Association of
Investment Management and Research.
38
John J. Apruzzese, (42), Managing Director and Senior
Portfolio Manager of U.S. Trust. Mr. Apruzzese is a
Division Manager in the Wealth Management Group.
Previously, Mr. Apruzzese was a staff member of the
Labor and Human Resources Committee of the U.S.
Senate and worked on federal budget matters. Mr.
Apruzzese received his B.A. from Bucknell University
and his M.B.A. from New York University. Mr.
Apruzzese is a Chartered Financial Analyst, a member
of the New York Society of Security Analysts and a
member of the Board of Advisors of Outward Bound.
Richard L. Bayles, (56), Managing Director and Senior
Portfolio Manager of U.S. Trust. Mr. Bayles manages
the Common Stock Fund for Trusts. Mr. Bayles earned
his B.A. from Dartmouth College. He is a warden of
St. Bartholomew's Church in the City of New York. Mr.
Bayles served with the Peace Corps in Kenya for three
years and is President, Mid Manhattan Performing Arts
Foundation.
Edith Cassidy, (47), Managing Director and Division
Manager at U.S. Trust company of New York. Ms.
Cassidy is responsible for managing individual client
assets and a division of portfolio managers,
administrators and support staff. Ms. Cassidy is a
member of the U.S. Trust's Operating Committee and
Portfolio Policy Committee. Upon joining U.S. Trust
in 1989, Ms. Cassidy was appointed Director of the
Equity Research Division. Prior to joining U.S. Trust
in 1989, Ms. Cassidy was an investment executive at
Piper, Jaffray & Hopwood in New York City. From 1976
through 1986, she was with International Business
Machines Corporation in New York, where her last
position was Marketing Manager. Ms. Cassidy is a
member of the New York Society of Security Analysts.
She is a member of the Board of Trustees of The
Westmoreland Davis Foundation and Learning Leaders.
Ms. Cassidy received her B.A. in 1975 from - Goucher
College.
William V. Ferdinand, (58), Managing Director and
Senior Investment Officer of U.S. Trust Company. Mr.
Ferdinand is responsible for managing the investment
organization of U.S. Trust Company. With eleven portfolio
managers, this group actively manages over $2.6
billion of assets. In addition, Mr. Ferdinand is a
member of the Portfolio Policy Committee,
headquartered at U.S. Trust in New York. With over 30
years of investment management experience, he comes
to U.S. Trust from The Penn Mutual Life Insurance
Company, where he served as Executive Vice President
and Chief Investment Officer as well as President and
Chief Executive Officer of the investment management
subsidiaries. His background includes over 10 years
of senior trust investment experience in Connecticut
and Pennsylvania. He is a member of the Board of
Directors of U.S. Trust Company. Mr. Ferdinand is a CFA
and received a B.S. degree from the University of
Pennsylvania Wharton School of Business. He earned
his MBA from New York University. He is a member of
the New York and International Society of Security
Analysts and the Association for Investment
Management and Research.
Joseph A. Gallagher, (58), Senior Vice President of
U.S. Trust Company of New Jersey. Prior to joining
U.S. Trust, Mr. Gallagher was Managing Director of
Delafield, Harvey, Tabell, which was acquired by U.S.
Trust in 1992. Previously, he held the positions of
Senior Portfolio Manager in the Private Banking and
Investment Division at Citibank, N.A. and Vice
President-- Investments at United Jersey Bank. Mr.
Gallagher received his BS degree from Georgetown
University. He is a Chartered Financial Analyst and a
member of the New York Society of Security Analysts
and the Association for Investment Management and
Research.
Timothy C. Pettee, (41), Managing Director of U.S.
Trust. Mr. Pettee is currently the Director of Equity
Research at U.S. Trust. He is responsible for
supporting over 100 portfolio managers with $40
billion plus in equity assets under management with
proprietary analysis from the research department.
Prior to joining U.S. Trust, Mr. Pettee worked for 8
years at Alliance Capital Management, LP as an
analyst in both the domestic and international
research departments. In addition, he managed the
Alliance Global Leisure Fund, the Alliance American
Fund and co-managed funds run by the research
department. Prior to Alliance, Mr. Pettee was with
Merrill Lynch and Bear Stearns & Co. Mr. Pettee holds
a B.A. from Boston University.
39
Harvey A. Seline, (61), is a Managing Director and
Senior Portfolio Manager of U.S. Trust. Mr. Seline is
a Division Manager in the Personal Wealth Management
Group. He has been with U.S. Trust since 1969. Prior
to joining U.S. Trust, he was a Trust Investment
Officer at The National Bank of Tulsa and a Trust
Analyst at First City National Bank in Houston. Mr.
Seline received his B.A. from the University of
Colorado and his M.B.A. from the Columbia University
Graduate School of Business Administration. Mr.
Seline is a Chartered Financial Analyst, a member of
the New York Society of Security Analysts and a
member of The Association for Investment Management
and Research.
Jay B. Springer, (41), Managing Director and Senior
Portfolio Manager of U.S. Trust. Mr. Springer is a
Division Manager in the Personal Wealth Management
Group. Previously, he worked as a Financial Analyst
at Citibank. Mr. Springer earned his B.B.A., magna
cum laude, from Boston University and his M.B.A. from
New York University Graduate School of Business. He
is currently a member of The New York State Bankers
Association Trust Investment Committee and is a
former director of Bank Fiduciary Funds. Mr. Springer
serves on the Board of Directors of
Christmas-in-April-USA.
David A. Tillson, (51), Managing Director and Senior
Portfolio Manager of U.S. Trust. Mr. Tillson is a
Division Manager in the Personal Wealth Management
Group. Prior to joining U.S. Trust, he was the
President of TDA Capital Management Company, which he
formed in 1990. From 1992 until he joined U.S. Trust,
he was also a Senior Vice President at Matrix Asset
Advisors. Prior to founding TDA Capital management,
he was a Vice President, portfolio manager and
director of research at Management Asset Corporation.
He also held positions at W.P. Carey & Company and
General Reinsurance Corporation. Mr. Tillson received
his B.A. in 1971 from Brown University and his MBA in
1974 from New York University. A Chartered Financial
Analyst, Mr. Tillson is a member of the New York
Society of Security Analysts and the Association for
Investment Management Research.
Leigh Weiss, (45), Managing Director of U.S. Trust
and Manager of Institutional Equity and Balanced
Portfolios. Mr. Weiss has been with the Trust Company
since September of 1993. Prior to joining U.S. Trust,
he worked for Goldman, Sachs & Co., where he had been
since 1981. Mr. Weiss received his B.S. degree in
Economics from the Wharton School of the University
of Pennsylvania and he earned his MBA from the
University of Chicago.
David J. Williams, (age), Managing Director and
Senior Portfolio Manager of U.S. Trust, Mr. Williams
is a Portfolio Manager with over 20 years of
investment experience. He is a member of U.S. Trust's
Investment Policy Committee and manages the Value and
Restructuring Fund. Formerly, Mr. Williams was a
Senior Vice President and the Senior Investment
Officer of Horizon Trust Company in Morristown, New
Jersey. He was also a Portfolio Manager with T. Rowe
Price Associates, Inc. in Baltimore, Maryland. Mr.
Williams received his B.A. from Yale University and
his M.B.A. from Harvard University. He is a Chartered
Financial Analyst.
George C. Whiteley III, (60), Managing Director and
Senior Portfolio Manager of U.S. Trust. Mr. Whiteley
is a Division Manager in the Personal Wealth
Management Group. He joined the Trust Company in
1995. Prior to joining U.S. Trust, he worked for
Chase Manhattan Bank where he was Vice President and
Chief Investment Executive of U.S. Private Banking.
Mr. Whiteley received his B.A. degree from Harvard
College and was awarded his J.D. from New York
University School of Law.
BOARD OF MANAGER COMPENSATION
Each member of the Board of Manager will receive $15,000 per year.
No member of the Board of Managers or officer will receive aggregate
compensation from the Company in excess of $15,000 for fiscal 2000. The
Company does not have a stock option plan, other long-term incentive plan,
retirement plan or other retirement benefits.
40
ESTIMATED COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION FROM BENEFITS ACCRUED AS BENEFITS UPON FROM COMPANY AND FUND
POSITION THE COMPANY PART OF FUND EXPENSES RETIREMENT COMPLEX*
<S> <C> <C> <C> <C> <C>
$ 0 0 $[ ] (3 Funds)
$ 0 0 $[ ] (3 Funds)
$ 0 0 $[ ] (3 Funds)
- -------------------
* The total compensation paid to such persons by the Company and
Fund Complex is estimated for the fiscal year ending December 31,
2000. The parenthetical number represents the number of investment
companies (including the Company) from which such person receives
compensation that are considered part of the same Fund Complex as
the Company, because, among other things, they have a common
investment advisor.
</TABLE>
EXPENSES OF THE COMPANY
The Company will pay all of its expenses, including fees of the
members of the Board of Managers; fees of the Investment Adviser; expenses
of registering the Units under federal and state securities laws; interest;
taxes; fees and expenses of the Company's legal counsel and independent
accountants; fees and expenses of the transfer agent; expenses of printing
and mailing, member reports, notices to members and proxy statements;
reports to regulatory bodies; brokerage and other expenses in connection
with the execution, recording and settlement of portfolio security
transactions; expenses in connection with the acquisition and disposition
of portfolio securities or the registration of privately issued portfolio
securities; costs of third party evaluations or appraisals of the Company
(or its assets) or its actual investments; expenses of membership in
investment company associations; expenses of fidelity bonding and other
insurance premiums; expenses of members' meetings; Commission and state
blue sky registration fees; fees payable to the NASD, if any, in connection
with this offering; and the Company's other business and operating
expenses.
On the basis of the anticipated size of the Company immediately
following the offering described in this Prospectus, it is estimated that
the Company's annual operating expenses will be approximately [$ ]
(approximately _% of the proceeds of the offering). While the foregoing
estimates have been made in good faith on the basis of information as to
currently available prices, including estimates furnished by the Company's
agents, there can be no assurance that actual annual operating expenses
will not be substantially greater than such estimates as a result of
increases in the cost of transfer agency and professional and similar
services that cannot be predicted and are beyond the control of the
Company.
Organizational and offering expenses are estimated at [$_______]
and have been incurred by U.S. Trust and will be reimbursed by the Company.
Each investor's share of organizational and offering costs will be deducted
from his or her capital account.
CONTROL PERSONS
Prior to completion of the first subscription closing, no person
owned any voting securities of the Company. The Investment Adviser and/or
the Manager may be deemed to control the Company as a result of their
rights and duties under the Advisory Agreement and the Operating Agreement.
41
POTENTIAL CONFLICTS OF INTEREST
The Investment Adviser, the Manager and their affiliates may be
subject to various conflicts of interest in connection with their
relationships and transactions with the Company. The contractual and other
arrangements between the Company and the Investment Adviser, the Manager
and their affiliates have not been established by arms-length negotiations.
Such conflicts of interest may include:
Transactions with the Company and Portfolio Companies. The
Investment Adviser, the Manager and their affiliates may perform various
services for the Company and its portfolio companies. Such services may
include making loans to the Company or to portfolio companies, maintaining
deposits of funds of the Company or portfolio companies, serving as
directors or officers of portfolio companies and providing services in
connection with mergers and acquisitions, leasing real estate and insurance
and economic forecasting. In consideration for such services, such persons
may receive various fees, commissions and reimbursements to the extent
permitted under applicable law. Depending upon the Investment Adviser's,
the Manager's or their affiliates' influence and control with respect to
portfolio companies, the selection of such persons to perform such services
for portfolio companies may not be a disinterested decision and the terms
and conditions for the performance of such services, and the amounts and
terms of such compensation, may not be determined in arms-length
negotiations. The selection of the Investment Adviser, the Manager or any
of their affiliates to perform services for a portfolio company must be
approved by a majority of the disinterested members of the Board of
Managers of the Company and the independent and disinterested directors of
the portfolio company. The interest rate and financing charges that such
persons may charge the Company or its portfolio companies on funds made
available to it or them will not exceed those that would be charged by
unrelated lending institutions on comparable loans for the same purpose.
The Investment Company Act and the Federal Reserve Act contain
restrictions as to certain transactions among the Company and the
Investment Adviser, the Manager or their affiliates. See "Regulation."
Generally, transactions involving the Company and the Investment Adviser,
the Manager or certain of their affiliates must receive the prior approval
of a majority of the disinterested members of the Board of Managers having
no financial interest in the proposed transaction and/or the Commission and
may be subject to certain percentage limitations, safety-and-soundness and
other requirements. There can be no assurance that prior approval of the
Commission can be obtained.
The Investment Adviser and the Manager expect to provide services
to other investors, including, in the case of the Investment Adviser, Fund
I and Fund II, and including other investment funds and other business
development companies organized by them or their affiliates. The Company
will have no contractual or other right to such services prior to any of
such other investors. The Investment Adviser may file on behalf of itself
and the Company an application for an exemptive order from the Commission
with respect to proposed joint investments by the Company and U.S. Trust or
certain of its affiliates in portfolio companies. If an exemptive order is
not granted, certain joint investments with U.S. Trust or its affiliates
will be prohibited. While the Commission has granted exemptive relief in
substantially similar circumstances in the past, no assurance can be given
that an exemptive order will be granted. If the Company and U.S. Trust or
its affiliates co-invest in a portfolio company, certain conflicts may
arise. See "Potential Conflicts of Interest -- Joint Investments in
Portfolio Companies and Other Securities" and "Regulation."
Conflicts as to Investment Opportunities. The Investment Adviser
and its affiliates intend to make investments for their own account and may
be in competition with the Company for such investments. In addition,
affiliates of the Investment Adviser may serve as adviser or manager of
other private or public investment vehicles that will have investment
objectives identical with or similar to those of the Company. While the
Investment Adviser is obligated to endeavor to provide the Company with
continuing and suitable investment opportunities consistent with its
investment objective and policies, the Investment Adviser is not required
to present to the Company any particular opportunity that falls within the
investment objective and policies of the Company, except as set forth in
the procedures adopted by the Company's Board of Managers. Such procedures
provide that the Investment Adviser must endeavor to offer to the Company
on an equitable basis investment opportunities that would be suitable for
both the Company and other similar private equity funds for which the
Investment Adviser provides discretionary investment advisory services.
Within 60 days after the end of each fiscal year of the Company, the
Investment Adviser will furnish the Board of Managers of the Company with
information on a confidential basis as to any investments made
42
by the Investment Adviser or its affiliates for their own accounts during
the prior year of the types eligible for investment by the Company. The
Investment Adviser and its affiliates will endeavor to resolve conflicts
with respect to investment opportunities in a manner deemed equitable to
all and consistent with their fiduciary duties to the Company.
Joint Investments in Portfolio Companies and 0ther Securities. The
Investment Adviser and its affiliates and employees may participate with
the Company as co-investors in portfolio companies and other securities and
may make loans to, or other investments in, portfolio companies. Such
participation will be required to be on a basis which, in the judgment of
the Board of Managers, is not more advantageous to such other persons than
the basis upon which the Company participates in such joint investments,
and will require the prior approval of the Board of Managers, including a
majority of the disinterested Managers. Without prior approval by the Board
of Managers and/or the Commission, the Company will not make joint
investments in the securities of any entity if the Investment Adviser or
any of its affiliates have previously acquired a security issued by such
entity, provided that this prohibition does not apply to follow-on
investments. In most such instances, prior approval of the Commission of
such joint investments would be required. There can be no assurance that
such approval will be obtained. See "Regulation."
Timing of Disposition of Investments. The Manager receives certain
allocations and distributions determined by the amount of net realized
capital gains (net of realized capital losses and net unrealized capital
depreciation) of the Company as set forth under "Description of the Company
- - Allocations and Distributions." The interests of the Investment Adviser
and the Manager may conflict with the interests of the members with respect
to the timing of the disposition of Company investments. The acts of the
Investment Adviser are subject to supervision by the Board of Managers.
Allocation of Management Time and Services. The Company will not
have independent management or employees and will rely upon the Manager and
its affiliates for management and administration of the Company and its
assets. The Manager believes that it and its affiliates have or can attract
sufficient personnel to discharge all of their responsibilities to the
Company. Conflicts of interest may arise in allocating management time,
services or functions between the Company and other entities for which the
Manager and its affiliates (including the Investment Adviser) may provide
similar services. The officers and directors of the Manager and its
affiliates will devote such time to the affairs of the Company as they, in
their sole discretion, determine to be necessary for the conduct of the
business of the Company. The Company's Board of Managers will supervise the
activities of the Manager.
Other Relationships with Portfolio Companies. The Investment
Adviser and its affiliates may have other relationships on an on-going
basis with portfolio companies in which the company has invested. Such
relationships could influence the Investment Adviser or its affiliates to
take actions, or forbear from taking actions, which an independent
investment adviser might not take or forbear from taking. The Investment
Adviser and its affiliates will not enter into any other relationship with
a portfolio company unless such relationship has been approved by a
majority of the disinterested members of the Board of Managers of the
Company and by the independent directors of the portfolio company who also
have no interest in the relationship.
CUSTODIAN AND TRANSFER AGENT
The Chase Manhattan Bank ("Chase") will serve as the Company's
custodian in accordance with the provisions of the Investment Company Act
and the rules and regulations thereunder. As such, Chase will be
responsible for holding the Company's cash and portfolio securities. Chase
will also serve as the transfer agent and distribution paying agent for the
Company's Units. For its custodian, transfer agency and paying agency
services, Chase will receive customary fees from the Company. Chase's
address is:
CHASE MANHATTAN BANK,
4 NEW YORK PLAZA,
NEW YORK, NY 10004.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Subject to policies established by the Board of Managers, the
Investment Adviser will arrange for the execution of the Company's
portfolio transactions and the allocation of brokerage. In executing
portfolio transactions, the Investment Adviser will seek to obtain the most
favorable execution of portfolio transactions, that is the best
43
combination of net price and prompt reliable execution. In the Investment
Adviser's opinion, it is not possible to determine in advance that any
particular broker will actually be able to effect the most favorable
execution because, in the context of a constantly changing market, order
execution involves judgments as to the price, volume, trend and breadth of
the market, possibility of a block transaction, and the broker's activity
in the security as well as its general record for prompt, competent and
reliable service in all aspects of order processing, execution and
settlement as well as anticipated commission rates.
A portion of the securities in which the Company will invest may
be traded in the over-the-counter markets, and the Company intends to deal
directly with the dealers who make markets in the securities involved,
except in those circumstances where better prices and execution are
otherwise available. Under the Investment Company Act, persons affiliated
with the Company are prohibited from dealing with the Company as principal
in the purchase and sale of securities. Transactions in the
over-the-counter markets usually involve transactions with dealers acting
as principal for their own account. The Company will not deal with
affiliated persons as principal; however, affiliated persons of the Company
may serve as its broker in over-the-counter markets and other transactions
conducted on an agency basis in accordance with the Investment Company Act.
If an affiliated person of the Company is a market maker in the securities
of a company, the affiliated person will not serve as the Company's broker
in the purchase of such securities.
The Investment Adviser has no obligation to deal with any broker
or group of brokers in the execution of transactions. With respect to
certain securities, the Company's portfolio transactions may be effected
through affiliates of the Investment Adviser, provided it is consistent
with the policy of obtaining the most favorable execution. The Company's
Board of Managers has adopted procedures to ensure compliance with
applicable regulations relating to trading of portfolio securities.
In allocating brokerage among other brokers who are believed to be
capable of providing equally favorable execution, the Company may also take
into consideration the fact that a particular broker may, in addition to
execution capability, provide other services to the Company such as
research and statistical information.
Research services so received are in addition to and not in lieu of
services required to be performed by the Investment Adviser and does not
reduce the investment advisory fees payable by the Company. Such services
may be useful to the Investment Adviser in serving the Company and other
clients and, conversely, research services obtained by the placement of
brokerage business of other clients may be useful to the Investment Adviser
in carrying out its obligations to the Company. The Investment Adviser
might incur significant expense were it to purchase such research services
from the parties.
PORTFOLIO TURNOVER
Because the investments of the Company generally require
relatively long periods of time to reach maturity, it is expected that the
Company's portfolio turnover will be low. There is, however, no policy
limitation on the ability of the Company to sell an investment after a
short period of time. Any short-term securities in which the Company
invests will have a high rate of turnover.
Portfolio turnover will generally involve some expense to the
Company, including brokerage commissions or dealer mark-ups and other
transaction costs on the sale of securities and, where permitted,
reinvestment in other securities. The portfolio turnover rate will be
computed by dividing the lesser of the amount of the securities purchased
or securities sold during the year by the average monthly value of
securities owned during the year (excluding securities whose maturities at
acquisition were one year or less).
REGULATION
The Investment Adviser Act of 1940, as amended (the "Investment
Adviser Act"), generally prohibits investment advisers from entering into
investment advisory contracts with an investment company that provides for
compensation to the investment advisers on the basis of a share of capital
gains upon or capital appreciation of the funds or any portion of the funds
of the investment company. In 1980, Congress enacted the Small Business
Investment Incentive Act of 1980 which added provisions to the Investment
Adviser Act which permit the payment of compensation to investment
advisers to a BDC based on capital gains.
44
In addition, the Small Business Investment Incentive Act of 1980
modified the provisions of the Investment Company Act that are applicable
to BDCs. The BDC is considered to be a closed-end, non-diversified
investment company as those terms are defined in the Investment Company
Act. The following is a brief description of the Investment Company Act, as
modified by the Small Business Investment Incentive Act of 1980, and is
qualified in its entirety by reference to the full text of the Investment
Company Act and the rules thereunder.
Generally, to be eligible to elect BDC status, a company must
engage in the business of furnishing capital and offering significant
managerial assistance to companies that do not have ready access to capital
through conventional financial channels. A BDC must be operated for the
purpose of making investments in securities of the types required by the
Investment Company Act, which types include certain present and former
"eligible portfolio companies" and certain bankrupt or insolvent companies.
A BDC need not invest in all of the possible types of securities approved
for investment by BDCs. Business development companies must also make
available significant managerial assistance to portfolio companies. An
eligible portfolio company generally is a United States company that is not
an investment company (except for wholly-owned Small Business Investment
Companies licensed by the Small Business Administration) and that (i) does
not have a class of securities registered on a national securities exchange
or included in the Federal Reserve Board's over-the-counter margin list,
(ii) is actively controlled by the BDC either alone or as part of a group
acting together and an affiliate of the BDC is a member of the portfolio
company's board of directors, or (iii) meets such other criteria as may be
established by the Commission. Control, under the Investment Company Act,
is presumed to exist where the BDC owns 25% of the outstanding voting
securities of the portfolio company.
The Investment Company Act limits the type of assets that the
Company may acquire to "qualifying assets" and certain assets necessary for
its operations (such as office furniture, equipment, and facilities)
unless, at the time of the acquisition, at least 70% of the value of the
Company's assets consists of qualifying assets. Qualifying assets include:
(i) securities of companies that were eligible portfolio companies at the
time the Company acquired their securities; (ii) securities of bankrupt or
insolvent companies that are not otherwise eligible portfolio companies;
(iii) securities acquired as follow-on investments in companies that were
eligible at the time of the Company's initial acquisition of their
securities but are no longer eligible, provided that the Company has
maintained a substantial portion of its initial investment in those
companies; (iv) securities received in exchange for or distributed on or
with respect to any of the foregoing; and (v) cash items, government
securities, and high-quality, short-term debt. The Investment Company Act
also places restrictions on the nature of the transactions in which, and
the persons from whom, securities can be purchased in order for the
securities to be considered qualifying assets. In addition, certain
provisions of the federal banking laws, including the Bank Holding Company
Act of 1956, as amended, would prohibit or restrict investments by the
Company in securities of commercial banking organizations.
The Company is permitted by the Investment Company Act, under
specified conditions, to issue multiple classes of senior debt and a single
class of equity senior to the Units if its asset coverage, as defined in
the Investment Company Act, is at least 200% after the issuance of the debt
or equity. In addition, provision must be made to prohibit any distribution
to members or the repurchase of any Units unless the asset coverage ratio
is at least 200% at the time of the distribution or repurchase.
After this offering, the Company may sell its securities at a
price that is below the prevailing net asset value per Unit only upon the
approval by the holders of a majority of its voting securities, including a
majority of the voting securities held by nonaffiliated persons, at its
last annual meeting. In addition, the Company may repurchase its Units
subject to the restrictions of the Operating Agreement and the Investment
Company Act.
Under the Investment Company Act as amended by the Small Business
Investment Incentive Act of 1980, certain of the transactions involving the
Company and its affiliates (as well as affiliates of those affiliates) that
would previously have been prohibited without the prior approval of the
Commission require the prior approval of a majority of the disinterested
members of the Board of Managers having no financial interest in the
transactions. Certain transactions involving certain closely affiliated
persons of the Company, including the Investment Adviser and the Manager,
and their officers and employees, still require the prior approval of the
Commission. In general, (i) any person who owns, controls, or holds with
power to vote, more than 5% of the outstanding Units, (ii) any director,
executive officer, or general partner of that person, and (iii) any person
who directly or indirectly controls, is controlled by, or is under common
control with, that person, must obtain the prior approval of a majority of
the
45
disinterested members of the Board of Managers and, in some situations,
the prior approval of the Commission, before engaging in certain
transactions involving the Company or any company controlled by the
Company. The Investment Company Act and applicable rules thereunder
generally do not restrict transactions between the Company and its
portfolio companies. In accordance with the Investment Company Act, a
majority of the members of the Board of Managers are not interested persons
of the Company as defined in the Investment Company Act. See "Management."
The Investment Company Act prohibits an investment company, such
as the Company, from knowingly participating in a joint transaction with an
affiliate of, any director or investment adviser to the investment company.
Accordingly, the Company may not, without exemptive relief from the
Commission, participate in a joint transaction with Fund I, Fund II or
other companies or funds which may be affiliates of the Company or the
Investment Adviser, or any other entity managed by the persons who are the
principals of the Investment Adviser (collectively, "Company Affiliates").
The Company and the Investment Adviser may submit an application to the
Commission to permit such co-investment. The Investment Adviser believes
that co-investment by the Company and any Company Affiliates would afford
the Company the ability to achieve greater diversification and, together
with any Company Affiliates, the opportunity to exercise greater influence
on the portfolio companies in which the Company and any Company Affiliates
invest together. Accordingly, the Company may file an application that
would seek an exemptive order permitting the Company and any Company
Affiliates to invest together in the same portfolio companies where such is
consistent with investment objectives, investment positions, investment
policies, investment strategies, investment restrictions, regulatory
requirements and other pertinent factors applicable to the Company.
Although the Investment Adviser intends to select investments for the
Company and for Company Affiliates separately, considering in each case
only the investment objectives, investment positions, available funds and
other pertinent factors of the particular investment company or fund, it is
expected that if the application for exemptive relief is granted, the
Company and any Company Affiliates may frequently invest in the same
portfolio companies. It is expected that prior to committing to a
co-investment, a "required majority" (as defined in Section 57(o) of the
Investment Company Act) of the members of the Board of Managers of the
Company would make certain findings concerning the fairness to the Company
of the co-investment arrangement.
46
VALUATION OF PORTFOLIO SECURITIES
Under the supervision of and in accordance with procedures adopted
by the Board of Managers, the Investment Adviser will value the securities
in the Company's portfolio quarterly and at such other time as, in the
Board's view, circumstances warrant. In the event of a sale by the Company
of its Units, the Investment Adviser must determine the net asset value
(the "NAV") of a Unit as of a date within 48 hours before such sale
(excluding Sundays and holidays) to comply with the requirement of the
Investment Company Act that securities not be sold below NAV without member
approval.
In order to determine the NAV per Unit, (i) the value of the
assets of the Company, including its portfolio securities, will be
determined by the Investment Adviser under the supervision of the Board of
Managers; (ii) the Company's liabilities will be subtracted therefrom; and
(iii) the difference will be divided by the number of outstanding Units of
the Company. For purposes of this calculation, any amount that the Manager
would be entitled to distribution of if the Company had cash available for
distribution will be treated as a liability of the Company.
Securities for which market quotations are readily available
generally will be valued at the last sale price on the date of valuation
or, if no sale occurred, at the mean of the latest bid and ask prices.
Securities for which market quotations are not readily available and other
assets will be valued at fair value as determined in good faith by the
Investment Adviser under the supervision of the Board of Managers and
pursuant to procedures established and periodically reviewed by the Board
of Managers. Securities having remaining maturities of 60 days or less are
valued at amortized cost.
The value for restricted stock investments for which no public
market exists is difficult to determine. Generally, such investments will
be valued on a "going concern" basis without giving effect to any
disposition costs. There is a range of values that is reasonable for such
investments at any particular time. In the early stages of development,
venture capital investments will typically be valued based upon their
original cost to the Company (the "cost method"). The cost method will be
utilized until significant developments affecting the portfolio company
provide a basis for use of an appraisal valuation (the "appraisal method")
by the Investment Adviser. The appraisal method will be based upon such
factors affecting the portfolio company as earnings, net worth, the market
prices for similar securities of comparable companies and an assessment of
the portfolio company's future prospects. In the case of unsuccessful
operations, the appraisal may be based upon liquidation value. Valuations
based on the appraisal method are necessarily subjective. The Company will
also use third party transactions (actual or proposed) in the portfolio
company's securities as a basis of valuation (the "private market method").
The private market method will only be used with respect to actual
transactions or actual firm offers by sophisticated, independent investors.
Securities with legal, contractual or practical restrictions on transfer
may be valued at a discount (typically ranging from 10% to 40%) from their
value determined by the foregoing methods to reflect the effect of such
restrictions.
The values for the types of investments referred to in the
preceding paragraph will be estimated regularly by the Investment Adviser
and, in any event, not less frequently than quarterly. However, there can
be no assurance that such value will represent the return that might
ultimately be realized by the Company from the investments.
The Company anticipates that it may invest in securities for which
a public market exists but which are "restricted securities" for purposes
of the Securities Act. In evaluating such securities, the Investment
Adviser will take into consideration various factors, including the price
at which the securities in question were acquired relative to the market
price for unrestricted shares of the same securities at the time of such
acquisition, modified as appropriate to reflect the nature of the market in
which the securities are traded, if any, the amount of the public float,
the existence and terms of any securities registration rights, the
proportion of the portfolio company's securities held by the Company,
changes in the financial condition and prospects of such portfolio company
and other factors which may affect their fair value, all in accordance with
the Investment Company Act. Restricted securities for which an established
trading market exists will typically be valued at a discount of 10% to 40%
from the public market price with the amount of the discount decreasing as
the restriction period decreases. If no such market exists, the asset will
be valued at cost unless management has good reason to use a different
valuation method (such as reliable private sales of a portfolio company's
securities at prices different from the value initially used by
management).
47
The Company's investments in Private Funds generally will be
valued based upon the Company's pro rata share of the value of the assets
of a Private Fund as determined by such Private Fund in accordance with its
by-laws, constitutional or other documents governing such valuation, on the
valuation date. If such valuation with respect to investments in Private
Funds is not available by reason of timing or other event on the valuation
date or are deemed to be unreliable by the Investment Adviser, the
Investment Adviser will determine such value based on the Investment
Adviser's judgment of fair value on the appropriate date, less applicable
charges, if any.
ALLOCATIONS AND DISTRIBUTIONS
Investors will become members of the Company, which will establish a
capital account for each member. Your capital contributions and your share
of items of gain will be credited to your capital account, and your
distributions and your share of items of loss, deduction and expense will
be debited from your capital account.
Allocations. The income, gain, loss, deduction and expense of the
Company will be determined and allocated as of the end of each fiscal year
to reflect the economic interests of the members and the Manager.
Each year, Company allocations generally will be made in the
following manner:
o all items of income, gain, loss, deduction and expense will
be allocated to the members in an amount equal to the
Members' Allocation pro rata in accordance with the members'
capital contributions; and
o gains will be allocated to the Manager until the cumulative
amount of all gains that has been allocated to the Manager
from the commencement of operations equals the Incentive
Carried Interest calculated through the end of the period
for which the allocation is being made.
The Members' Allocation is all items of income, gain, loss,
deduction and expense remaining after allocations have been made to the
Manager.
For any given period, the allocation of gain to the Manager
described above will be made out of long-term capital gain and short-term
capital gain in proportion to the amount of such gains available for
allocation.
As of any date, the Incentive Carried Interest will be an amount
equal to 20% of the excess, if any, of the cumulative amount of all capital
gains on all Direct Investments realized by the Company from the
commencement of operations through such date over the sum of:
o the cumulative amount of all capital losses on all
investments of any type realized by the Company from the
commencement of operations through such date; and
o the current net amount of unrealized capital depreciation on
all investments of any type all determined as of such date.
To the extent that the Company distributes property in kind, the
Company will be deemed to have realized gain or loss on such property based
on the value assigned to such property in accordance with the Company's
valuation procedures. In the event of the resignation or removal of the
Manager, the assets of the Company will be valued in accordance with the
Operating Agreement as of the date of resignation or removal, and the
Company will be deemed to have realized gain or loss on such assets based
on the valuations so assigned.
Notwithstanding the foregoing, the Manager may, in its sole and
absolute discretion, make special allocations of items of Company income,
gain, loss, deduction and expense in order to cause the capital account
balances of the members and the Manager to reflect the economic arrangement
set forth in the following paragraph.
48
Distributions. The Company will distribute all cash that the
Manager does not expect to use in the operation of the Company and that is
available after the payment of all expenses then due and the creation of
any reserves. The Company will make such distributions at least annually.
Each year, the Manager generally will be entitled to a distribution equal
to the excess of the Incentive Carried Interest as most recently calculated
over the cumulative amount of all prior distributions made to the Manager
in respect of the Incentive Carried Interest determined in prior years. The
members generally will be entitled to all amounts remaining for
distribution pro rata in accordance with their capital contributions. Upon
liquidation of the Company, any cash or other property available for
distribution will be distributed to the members and to the Manager pro rata
in accordance with their respective capital account balances.
Due to the nature of the Company's investments, investors should
not expect distributions of cash or property during the first several years
of the Company's operations. The Company will not reinvest income from its
investments or the proceeds from the sale of its investments, in each case
other than Short-Term Investments, except to make follow-on investments.
The Company may make distributions in kind of its property, which generally
would be treated for purposes of the Company's distribution policies as
distributions of cash in an amount equal to the current market value or
fair value of such property determined in accordance with the Company's
valuation procedures.
49
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax
consequences to the initial members who are U.S. persons. The discussion is
based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations, judicial authorities, published positions of the IRS
and other applicable authorities, all as in effect on the date hereof and
all of which are subject to change or differing interpretations (possibly
with retroactive effect). The discussion does not address all of the tax
consequences that may be relevant to a particular member or to members
subject to special treatment under federal income tax laws (e.g., banks and
certain other financial institutions, insurance companies, tax-exempt
organizations and non-U.S. persons). This discussion is limited to members
who hold their Units as capital assets. No ruling has been or will be
sought from the IRS regarding any matter discussed herein. Except as
expressed in "Tax Status of the Company" below, counsel to the Company has
not rendered any legal opinion regarding any tax consequences relating to
the Company or an investment in the Company. No assurance can be given that
the IRS would not assert, or that a court would not sustain, a position
contrary to any of the tax aspects set forth below. PROSPECTIVE INVESTORS
MUST CONSULT THEIR OWN TAX ADVISORS AS TO THE FEDERAL INCOME TAX
CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF UNITS AS WELL AS THE
EFFECTS OF STATE, LOCAL AND NON-U.S. TAX LAWS.
TAX STATUS OF THE COMPANY. At the first subscription closing, the
Company will receive an opinion of its counsel, Skadden, Arps, Slate,
Meagher & Flom LLP, to the effect that, under current law and based on
certain assumptions and representations, the Company will be treated as a
partnership and not as a "publicly traded partnership" that is treated as a
corporation for federal income tax purposes. An opinion of counsel is not
binding on the IRS or any court.
A limited liability company (such as the Company) that has elected
to be treated as a business development company under the Investment
Company Act would be treated as a corporation for federal income tax
purposes if it became a publicly traded partnership. A publicly traded
partnership is a partnership, or limited liability company intended to be
treated as a partnership, whose interests are either traded on an
established securities market or readily tradable on a secondary market (or
the substantial equivalent thereof). Each of the Manager, the Investment
Adviser and the Company has represented to counsel for the Company that,
among other things, neither it, nor any affiliate thereof will participate
in the establishment of an established securities market or secondary
market (or the substantial equivalent thereof) for this purpose.
In addition, the Operating Agreement imposes significant
restrictions on transfer of Units in order to address this point. By
subscribing for Units, each member agrees to indemnify and hold harmless
the Company, the Investment Adviser, the Manager, each other member and any
affiliate of the foregoing against all losses, claims, damages,
liabilities, costs and expenses (including losses, claims, damages,
liabilities, costs and expenses of any judgments, fines and amounts paid in
settlement), joint or several, to which those persons may become subject by
reason of or arising from any transfer made by that member in violation of
the Operating Agreement or any misrepresentation made by that member in
connection with any purported transfer.
Ultimately, counsel's opinion as to the treatment of the Company
as a partnership for federal income tax purposes will be based on, among
other things, the maintenance of factual conditions (including those
underlying the representations of the Manager, the Investment Adviser and
the Company), the continuation of which cannot be assured. Company's
counsel will not render a Company tax status opinion or review such factual
environment after the first subscription closing.
If the Company were treated as a publicly traded partnership or
otherwise as a corporation for federal income tax purposes, material
adverse consequences for the members would result. The Company would be
subject to tax on its income at corporate tax rates, without a deduction
for any distribution to the members, thereby materially reducing the amount
of any cash available for distribution to the members. In addition, capital
gains and losses and other income and deductions of the Company would not
be passed through to the members, and the members would be treated as
shareholders for federal income tax purposes. Thus, all distributions by
the Company to the members would be treated as dividends, return of capital
and/or gains.
50
The following discussion assumes that the Company will continue to
be treated as a partnership for federal income tax purposes.
TAXATION OF MEMBERS OF THE COMPANY. By reason of its treatment as
a partnership for federal income tax purposes, the Company will not itself
be subject to federal income tax. Rather, each member in computing its
federal income tax will include his, her or its allocable share of Company
items of income, gain, loss, deduction and expense for the taxable year of
the Company ending within or with the taxable year of the member.
Nonliquidating cash distributions made by the Company to a member generally
will not be taxable to the member, except to the extent that the amount of
such cash distributions exceed the distributee's adjusted tax basis in his,
her or its Units. Nonliquidating distributions of property other than cash
are also generally not taxable. If both cash and other property are
distributed by the Company to a member, the member's adjusted tax basis in
his, her or its Units will be reduced first by the cash and then by the
Company's tax basis in the other property distributed. The member will have
a tax basis in non-liquidating, non-cash distributions of property equal to
the Company's tax basis in such property (but in no event in excess of the
member's adjusted tax basis in his, her or its Units).
For federal income tax purposes, a member's allocable share of
Company tax items will be determined by the provisions of the Operating
Agreement if such allocations have or are deemed to have "substantial
economic effect" or are determined to be in accordance with the members'
Units in the Company. The allocations under the Operating Agreement are
intended to satisfy such requirements. If, however, the IRS successfully
challenged the Company's allocations of income, gain, loss, deduction and
expense, the redetermination of the allocations to a particular member for
federal income tax purposes may be less favorable than the allocations set
forth in the Operating Agreement.
The Company may derive taxable income from an investment that is
not matched by a corresponding receipt of cash. This could occur, for
example, if the Company makes an investment in certain non-U.S.
corporations. See "Phantom Income from Company Investments in Non-U.S.
Corporations" below. This could also occur if the Company invests in an
entity that is classified as a partnership and such entity allocates income
or gain to the Company without making a corresponding distribution of cash.
Moreover, the Company is not required to make current distributions of its
entire earnings. In addition, a reduction of Company nonrecourse borrowings
(as defined for federal income tax purposes) would be treated as a
constructive distribution of cash to a member to the extent of his, her or
its allocable share of such reduction, even though an actual cash
distribution is not made. Accordingly, it is possible that a member's
federal income tax liability with respect to his, her or its allocable
share of the Company's earnings in a particular taxable year could exceed
the cash distributions to the member for the year, thus giving rise to an
out-of-pocket payment by the member.
TAX BASIS RULES. Company distributions generally will not be
taxable to a member to the extent of such member's adjusted tax basis in
his, her or its Units. In addition, a member is allowed to deduct his, her
or its allocable share of Company losses (if any) only to the extent of
such member's adjusted tax basis in his, her, or its Units at the end of
the taxable year in which the losses occur. A member's adjusted tax basis
is equal to the member's aggregate capital contributions to the Company as
adjusted by certain items. Basis is generally increased by the member's
allocable share of Company profits (and items of gain) and Company
nonrecourse borrowings (as defined for federal income tax purposes). Basis
is generally decreased by the member's allocable share of Company losses
(and items of loss, deduction and expense), the amount of cash distributed
by the Company to the member, the Company's tax basis of property (other
than cash) distributed by the Company to the member and any reduction in
the member's allocable share of Company nonrecourse borrowings (as defined
for federal income tax purposes).
To the extent that a member's allocable share of Company losses
are not allowed because the member has insufficient adjusted tax basis in
his, her or its Units, such disallowed losses may be carried over by the
member to subsequent taxable years and will be allowed if and to the extent
of the member's adjusted tax basis in subsequent years.
AT RISK RULES. Individuals and certain closely held C corporations
are allowed to deduct their allocable share of Company losses (if any) only
to the extent of each such member's "at risk" amount in the Company at the
end of the taxable year in which the losses occur. A member's at risk
amount generally is equal to the member's aggregate capital contributions
to the Company. To the extent that a member's allocable share of Company
losses are not allowed because the member has an insufficient amount at
risk in the Company, such disallowed losses may
51
be carried over by the member to subsequent taxable years and will be
allowed if and to the extent of the member's at risk amount in subsequent
years.
PASSIVE ACTIVITY LOSS RULES. Individuals, estates, trusts, closely
held C corporations and personal service corporations are not allowed to
deduct "passive activity losses" (as defined for federal income tax
purposes) against certain other income, such as salary or other
compensation for personal services, interest, dividends, annuities or
royalties not derived in the ordinary course of a trade or business and
gain attributable to the disposition of property that either produces such
nonbusiness income or is held for investment. The Company's investment
activities generally will not constitute a passive activity for purposes of
the passive activity loss rules. Therefore, a member will not be allowed to
offset his, her or its allocable share of Company items of income or gain
with the member's passive activity losses from other sources.
INVESTMENT INTEREST LIMITATION. Individuals and other noncorporate
taxpayers are allowed to deduct interest paid or accrued by the Company on
its indebtedness (so-called investment interest) only to the extent of each
such member's net investment income for the taxable year. A member's net
investment income generally is the excess, if any, of the member's
investment income from all sources (which is gross income from property
held for investment) over investment expenses from all sources (which are
deductions allowed that are directly connected with the production of
investment income). Investment income excludes net gain attributable to the
disposition of property held for investment (and thus would not include any
Company gains on the sale of its investments), unless the member elects to
pay tax on such gain at ordinary income rates.
To the extent that a member's allocable share of Company
investment interest is not allowed because the member has insufficient net
investment income, such disallowed investment interest may be carried over
by the member to subsequent taxable years and will be allowed if and to the
extent of the member's net investment income in subsequent years. If a
member borrows to finance the purchase of Units, any interest paid or
accrued on such borrowing will be investment interest that is subject to
these limitations. Since the amount of a member's allocable share of
Company investment interest that is subject to this limitation will depend
on the member's aggregate investment interest and net investment income
from all sources for any taxable year, the extent, if any, to which Company
investment interest will be disallowed under this rule will depend on each
member's particular circumstances each year.
OTHER LIMITATIONS ON DEDUCTIONS AND SPECIAL CODE PROVISIONS.
Prospective investors should be aware that they could be subject to various
other limitations on their ability to deduct their allocable share of
Company losses (or items of loss and deduction thereof). An individual,
estate or trust may deduct so-called miscellaneous itemized deductions,
which include the advisory fee and certain other expenses of the Company
and of Private Funds, only to the extent that such deductions exceed 2% of
the adjusted gross income of the taxpayer. Since the amount of a member's
allocable share of such expenses that is subject to this disallowance rule
will depend on the member's aggregate miscellaneous itemized deductions
from all sources and adjusted gross income for any taxable year, the
extent, if any, to which such expenses will be subject to disallowance will
depend on each member's particular circumstances each year. Other
limitations are imposed on itemized deductions of high-income individuals.
For federal income tax purposes, if a member of a limited
liability company performs services for the company and there is a related
direct or indirect allocation and distribution by the company to such
member, the allocation and distribution may be recharacterized as a fee. It
is intended that the Manager's Incentive Carried Interest constitute an
allocable share of Company earnings and not a fee. No assurance can be
given, however, that the IRS could not successfully assert that the
Incentive Carried Interest be recharacterized as a fee under these rules,
in which case members could be subject to the limitations on deductibility
relating to miscellaneous itemized deductions and certain other itemized
deductions of high-income individuals described above.
In addition, prospective investors should be aware that certain of
the Company's activities may be subject to various special provisions of
the Code that, among other things, defer or disallow the deductibility of
certain expenses. Organizational expenses of the Company are not currently
deductible, but may, at the election of the Company, be amortized ratably
over a period of not less than 60 months. Syndication expenses of the
Company (i.e., expenditures made in connection with the marketing and
issuance of Units, including placement fees) are neither deductible nor
amortizable.
52
NON-U.S. CURRENCY GAINS OR LOSSES. If the Company makes an
investment or obtains financing denominated in a currency other than the
U.S. dollar, then the Company may recognize gain or loss attributable to
fluctuations in such currency relative to the U.S. dollar. The Company may
also recognize gain or loss on such fluctuations occurring between the time
it obtains and disposes of non-U.S. currency, between the time it accrues
and collects income denominated in a non-U.S. currency, or between the time
it accrues and pays liabilities denominated in a non-U.S. currency. Such
gains or losses generally will be treated as ordinary income or loss.
PHANTOM INCOME FROM COMPANY INVESTMENTS IN NON-U.S. CORPORATIONS.
It is possible that the Company may invest in non-U.S. corporations that
could be classified as passive foreign investment companies, controlled
foreign corporations and foreign personal holding companies (each as
defined for federal income tax purposes). For federal income tax purposes
these investments may cause a member to recognize taxable income without a
corresponding receipt of cash, to incur an interest charge on taxable
income that is deemed to have been deferred and/or to recognize ordinary
income that would have otherwise been treated as capital gains.
NON-U.S. TAXES. It is possible that certain dividends and interest
received by the Company from sources outside of the U.S. will be subject to
withholding taxes imposed by other countries. In addition, the Company may
also be subject to capital gains taxes in certain other countries where it
purchases and sells stocks and securities. Tax treaties between the United
States and other countries may reduce or eliminate such taxes.
The Company will inform members as to their proportionate share of
non-U.S. taxes paid by the Company, and members will be required to
include such taxes in their income. Members generally will be entitled to
claim either a credit (subject, however, to various limitations on foreign
tax credits) or, if they itemize their deductions, a deduction (subject to
the limitations generally applicable to deductions) for their share of such
non-U.S. taxes in computing their federal income taxes.
SALE OF COMPANY INVESTMENTS AND TAX RATES. The Company will
generally recognize capital gain or loss on the sale of its investments.
For members who are individuals, the maximum federal income tax rate on
their allocable share of Company capital gains is 39.6% for capital assets
held by the Company for one year or less and 20% for capital assets held by
the Company for more than one year. The maximum federal income tax rate on
an individual's allocable share of Company ordinary income is 39.6%.
Corporations are subject to a maximum 35% federal income tax rate on their
allocable share of Company ordinary income and capital gains (whether
long-term or short-term).
LIMITATION ON DEDUCTIBILITY OF CAPITAL LOSSES. Capital losses are
deductible only to the extent of capital gains (subject to an exception for
individuals under which a limited amount of capital losses may be offset
against ordinary income).
SALE OF UNITS. Members will not be able or allowed to freely sell
or otherwise transfer their Units. In addition, none of the Company, the
Manager or the Investment Adviser (nor any affiliate thereof) will
repurchase any Units, except upon termination of the Company. By
subscribing for Units, each member agrees to indemnify and hold harmless
the Company, the Investment Adviser, the Manager, each other member and any
affiliate of the foregoing against all losses, claims, damages,
liabilities, costs and expenses (including losses, claims, damages,
liabilities, costs and expenses of any judgments, fines and amounts paid in
settlement), joint or several, to which those persons may become subject by
reason of or arising from any transfer made by that member in violation of
the Operating Agreement or any misrepresentation made by that member in
connection with any purported transfer. See "Risk Factors - Risks Related to
the Company - No Public or Other Market for Units."
A member that is allowed to sell his, her, or its Units will
recognize gain or loss measured by the difference between the amount
realized on the sale and the member's adjusted tax basis in the sold Units
(as described in "Tax Basis Rules" above). Such gain or loss generally will
be long-term capital gain or loss if the member held the sold Units for
more than one year. The amount realized will include the member's allocable
share of Company nonrecourse borrowings (as defined for federal income tax
purposes), if any, as well as any proceeds from the sale. Thus, a tax
liability upon the sale of Units may exceed the member's cash proceeds from
the sale.
ALTERNATIVE MINIMUM TAX. In certain circumstances, individuals,
corporations and other taxpayers may be subject to an alternative minimum
tax in addition to regular tax. A member's potential alternative minimum
tax liability
53
may be affected by reason of an investment in the Company. The extent, if
any, to which the alternative minimum tax applies will depend on each
member's particular circumstances for each taxable year.
TAX ELECTIONS. Under Section 754 of the Code, the Company may make
a generally irrevocable election to adjust the tax basis of its assets in
the event of a distribution of Company property to a member or in the event
of a transfer of Units (in which latter case basis will be adjusted with
respect to the transferee member only). The Company does not currently
intend to make a Section 754 election. Certain recent legislative proposals
would, if enacted, require the Company to make a Section 754 election. The
Manager has sole and absolute discretion to make all tax elections for the
Company.
REPORTS TO MEMBERS. The Company has the calendar year as its
taxable year. The Company will furnish annually to each member a report
containing a Schedule K-1 that indicates each member's distributive share
for each calendar year of Company income, gain, loss, deduction and expense
for use in the preparation of the member's income tax return. The Company
will endeavor to deliver Schedules K-1 to members prior to April 15 of each
year, but may not be able to do so because, among other things, the Company
may not receive, prior to April 15, a Schedule K-1 from a Private Fund that
is classified as a partnership for federal income tax purposes in which the
Company has invested. Accordingly, members may be required to obtain
extensions for filing their federal, state and local income tax returns
each year. The Company will provide members with estimated annual federal
income tax information prior to April 15, assuming the Company is able to
obtain such information.
TAX AUDITS. Although not required to pay any federal income tax,
the Company must file a federal income tax information return each taxable
year. The IRS may audit Company returns in a unified entity proceeding at
the Company level. The Manager, who would represent the Company at such an
audit as the so-called tax matters partner, has considerable authority to
make decisions affecting the tax treatment and procedural rights of the
members. The Manager may also generally enter into settlement agreements
with the IRS that bind members and consent on behalf of the Company to
extend the statute of limitations for assessing a deficiency with respect
to a Company item. Successful adjustments by the IRS of Company items of
income, gain, loss, deduction or expense could change a member's federal
income tax liabilities.
BACKUP WITHHOLDING. The Company may be required to withhold
federal income tax at a rate of 31% on a member's allocable share of
interest and dividends if the member fails to provide the Company with his,
her or its taxpayer identification number or a certificate that he, she or
it is exempt from backup withholding, or the IRS notifies the Company that
the member is subject to backup withholding. The member may be entitled to
a federal income tax credit for the amount of any backup withholding if the
required information is furnished to the IRS.
CERTAIN CONSIDERATIONS FOR TAX-EXEMPT INVESTORS. The Company may
from time to time borrow funds for operating purposes in an amount up to
25% of the value of its total assets (after giving effect to the borrowing)
in order to make additional investments in existing portfolio companies to
maintain various regulatory qualifications or to pay contingencies and
expenses. To the extent that the Company does so, an investment in the
Company will generate unrelated business taxable income for federal income
tax purposes (and may have other adverse tax consequences) for pension
funds, Keogh plans, individual retirement accounts, tax-exempt institutions
and other tax-exempt investors. Accordingly, such prospective investors are
urged to consult their own tax advisors concerning possible federal, state,
local and non-U.S. tax consequences from an investment in the Company.
STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES. In addition to the
federal income tax consequences described above, the members, as well as
the Company itself and the entities in which the Company invests, may be
subject to various state, local and non-U.S. taxes. A member's allocable
share of Fund income, gain, loss, deduction and expense may be required to
be included in determining such member's reportable income for state, local
and non-U.S. tax purposes. In addition, state, local and non-U.S. taxation
of such Company tax items may differ from the treatment of such items for
federal income tax purposes.
The Manager has sole and absolute discretion to file or not to
file composite, group or similar state, local and non-U.S. tax returns on
behalf of the members (where and to the extent permissible under applicable
law). If the Manager decides to make any such composite, group or similar
filing, such a filing would eliminate a Member's filing requirement in such
a jurisdiction arising by reason of an investment in the Company. Each
member will be required
54
to execute any relevant documents (including a power of attorney
authorizing such a filing), to furnish any relevant information and
otherwise to do anything necessary in order to facilitate any such
composite, group or similar filing. Any taxes paid by the Company in
connection with any such composite, group or similar filing will be treated
as an advance to the relevant members (with interest being charged thereon)
and will be recouped by the Company out of any distributions subsequently
made to such relevant members. Such advances may be funded by the Manager
or an affiliate thereof (with interest thereon). Both the deduction for
interest payable by the Company to the Manager (or an affiliate thereof)
with respect to such advances, and the corresponding income from interest
received by the Company from the relevant members, will be specially
allocated to such Members, and such interest expense may be subject to
limitations on deductibility (see "Investment Interest Limitation" above).
Such taxes may be higher or lower than what a member's state, local or
non-U.S. tax liability would be in the absence of such a composite, group
or similar filing.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF ACQUIRING,
HOLDING AND DISPOSING OF UNITS.
ERISA CONSIDERATIONS
The following is intended to be a summary only and is not a
substitute for careful planning with a professional. Employee benefit plans
subject to either the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or section 4975 of the Code considering purchasing the
Shares should consult with their own counsel regarding the application of
ERISA and the Code to their purchase of the Shares.
FIDUCIARY CONSIDERATIONS
ERISA and the Code impose certain restrictions on (a) employee
benefit plans (as defined in Section 3(3) of ERISA), (b) plans described in
section 4975(e)(1) of the Code, including individual retirement accounts
("IRAs") or Keogh plans, (c) any entities whose underlying assets include
plan assets by reason of a plan's investment in such entities (each a
"Plan") and (d) persons who have certain specified relationships to such
Plans ("Parties-in-Interest" under ERISA and "Disqualified Persons" under
the Code, collectively referred to herein as "Parties in Interest").
Moreover, based on the reasoning of the United States Supreme Court in John
Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993),
an insurance company's general account may be deemed to include assets of
the Plans investing in the general account (e.g., through the purchase of
an annuity contract), and the insurance company might be treated as a
Party-in-Interest or Disquaified Person with respect to a Plan by virtue of
such investment. ERISA also imposes certain duties on persons who are
fiduciaries of Plans subject to ERISA. Before investing in the Shares, a
Plan fiduciary should ensure that such investment is in accordance with its
fiduciary responsibilities and ERISA's general fiduciary standards. In
making such a determination, a Plan fiduciary should be sure that the
investment is in accordance with the governing instruments and the overall
policies of the Plan, and that the investment will comply with the
diversification and prudence requirements of ERISA. A Plan fiduciary should
also consider the tax aspects of an investment in the Shares discussed in
"Certain Federal Income Tax Considerations." In addition, provisions of
ERISA and the Code prohibit transactions involving the assets of a Plan and
Parties in Interest, unless an exemption is available for such transaction.
The consequences of such prohibited transactions include the imposition of
excise taxes, possible disqualification of IRAs, and other liabilities. A
Plan fiduciary should be sure that an investment in the Shares will not
constitute or give rise to a direct or indirect non-exempt prohibited
transaction. A Plan fiduciary should also consider prohibitions in ERISA
relating to delegation of control over or responsibility for "plan assets."
PLAN ASSETS CONSIDERATIONS
In certain circumstances where a Plan holds an interest in an
entity, the assets of the entity are deemed to be "plan assets" of such
Plan for purposes of the fiduciary and prohibited transactions provisions
of ERISA and the Code. In addition, under such circumstances, any person
that exercises authority or control with respect to the management or
disposition of such assets is Plan fiduciary. Plan assets are not defined
in ERISA or the Code, but the United States Department of Labor has issued
a regulation (the "Regulation") that outlines the circumstances under which
a Plan's interest in an entity will result in the assets of the entity
being deemed to constitute Plan assets.
THE ACQUISITION AND HOLDING OF COMPANY UNITS
The Manager, the Investment Adviser or certain affiliates thereof
may be "Parties-in-Interest" with respect to a number of Plans.
Accordingly, investment in the Units by a Plan that has such a relationship
could be deemed to constitute a transaction prohibited under Title I of
ERISA or Section 4975 of the Code (e.g., the indirect transfer to or use by
Party-in-Interest of assets of a Plan.) Such transactions may, however, be
subject to one or more statutory or administrative exemptions such as
Prohibited Transaction Class Exemption ("PTCE") 90-1, which exempts certain
transactions involving insurance company pooled separate accounts; PTCE
91-38, which exempts certain transactions
55
involving bank collective investment funds; and PTCE 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager," PTCE 95-60, which exempts certain transactions
involving insurance company general accounts; PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house asset
manager;" or another available exemption. Such exemptions may not, however,
apply to all of the transactions that could be deemed prohibited
transactions in connection with a Plan's investment.
THE TREATMENT OF THE COMPANY'S UNDERLYING ASSETS UNDER ERISA
The DOL has issued a regulation (29 C.F.R. ss. 2510.3-101)
concerning the definition of what constitutes the assets of a Plan (the
"Plan Asset Regulation"). This regulation provides that, as a general rule,
the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan purchases an "equity interest"
will be deemed for purposes of ERISA to be assets of the investing Plan
unless certain exceptions apply. The Plan Asset Regulation defines an
"equity interest" as any interest in an entity other than an instrument
that is treated as indebtedness under applicable local law and which has no
substantial equity features. The Units offered hereby should be treated as
"equity interests" for purposes of the Plan Asset Regulation.
An exception under the Plan Asset Regulation is provided for an
investment in an "operating company," which is defined in the Plan Asset
Regulation to include a "venture capital operating company" (a "VCOC"). To
be a VCOC, an entity must have at least 50% of its assets (other than short
term investments pending long-term commitment or distribution to
investors), valued at cost, invested in "venture capital investments,"
which are defined as companies in the business of selling goods or services
(other than the investment of capital) with respect to which the entity has
or obtains management rights. The Company intends to take such steps as may
be necessary to qualify as a venture capital operating company.
If, however, none of the exceptions under the Plan Asset
Regulation was applicable and the Company were deemed to hold Plan assets
by reason of a Plan's investment in Units (or other equity security of the
Company), such Plan's assets would include an undivided interest in the
assets held by the Company. In such event, such assets, transactions
involving such assets and the persons with authority or control over and
otherwise providing services with respect to such assets would be subject
to the fiduciary responsibility provisions of Title I of ERISA and the
prohibited transaction provisions of ERISA and Section 4975 of the Code and
there is no assurance that any statutory or administrative exemption from
the application of such rules would be available.
Accordingly, prior to the date the Company qualifies as a venture
capital operating company, the Company will treat its asets as "Plan
assets" and will not pay any expenses or fees to the Investment Adviser or
its affiliates from the assets of the Company. Such fees and expenses will
be paid upon qualification as a VCOC.
Based on the reasoning of the United States Supreme Court in John
Hancock Mutual Life Ins. Co. v. Harris Trust and Sav. Bank, 114 S. Ct. 517
(1993), an insurance company's general account may be deemed to include
assets of the Plans investing in the general account (e.g., through the
purchase of an annuity contract), and the insurance company might be
treated as a Party-in-Interest with respect to a Plan by virtue of such
investment. Any purchaser that is an insurance company using the assets of
an insurance company general account should note that the Small Business
Job Protection Act of 1996 added new Section 401(c) of ERISA relating to
the status of the assets of insurance company general accounts under ERISA
and Section 4975 of the Code. Pursuant to Section 401(c), the Department of
Labor issued final regulations effective January 5, 2000 (the "General
Account Regulations") with respect to insurance policies issued on or
before December 31, 1998 that are supported by an insurer's general account.
Section 401(c) also provides that, except in the case of avoidance of the
General Account Regulation and actions brought by the Secretary of Labor
relating to certain breaches of fiduciary duties that also constitute
breaches of state or federal criminal law, until the date that is 18 months
after the General Account Regulations becomes final, no liability under the
fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 may result on the basis of a claim that the assets of the
general account of an insurance company constitute the plan assets of any
such plan. The plan asset status of insurance company separate accounts is
unaffected by new Section 401(c) of ERISA, and separate account assets
continue to be treated as the plan assets of any such plan invested in a
separate account.
56
Any Plan fiduciary that proposes to cause a Plan to purchase Units
should consult with its counsel with respect to the potential applicability
of ERISA and the Code to such investment and determine on its own whether
any exceptions or exemptions are applicable and whether all conditions of
any such exceptions or exemptions have been satisfied.
Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the Units is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
The sale of the Units is in no respect a representation by the
Company or any other person that such an investment meets all relevant
legal requirements with respect to investments by Plans generally or that
such an investment is appropriate for any particular Plan.
DESCRIPTION OF UNITS
The Company has been formed as a Delaware limited liability company
and as such is governed by Delaware law and an operating agreement (the
"Operating Agreement") that defines many of the rights and responsibilities
of the Board of Managers, the Manager and members. A copy of the Operating
Agreement is attached hereto as Exhibit A. Investors will become members of
the Company, which will establish a capital account for each member. Your
capital contributions and your share of items of gain will be credited to
your capital account and your distributions and your share of items of
loss, deduction and expense will be debited from your capital account.
SUMMARY OF LIMITED LIABILITY COMPANY OPERATING AGREEMENT
The Operating Agreement governs the relationships, rights, and
obligations of the investors in the Company. The following is intended only
as a summary of certain provisions of the Operating Agreement not discussed
elsewhere in this Prospectus. The statements made herein do not purport to
be complete and are qualified by reference to the Operating Agreement.
Prospective investors should study the entire Operating Agreement before
signing the Subscription Agreement.
Fund Capital. Except as specifically provided in the Operating
Agreement, no investor is entitled to interest on any capital contribution
to the Company or on such investor's capital account. Except as otherwise
provided in the Operating Agreement, no investor has the right to withdraw,
or to receive any return of, such investor's capital contribution. No
investor is required to make any additional capital contributions to the
Company beyond the amount of the investor's subscription, which will be
payable in two equal installments. See "Limited Liability of Investors."
Voting Rights of Investors. The investors cannot participate in
the management or control of the Company. However, the Operating Agreement
provides that, subject to certain conditions described below, the investors
may vote on or approve certain Company matters. Upon notification to the
Manager, investors may, at their expense, obtain a list of the names and
addresses (if known) of all of the investors for a purpose reasonably
related to such investor's interest as an investor of the Company.
Subject to the provisions described below, the investors may: (i)
approve and elect and for cause disapprove and remove the members of the
Board of Managers; (ii) approve or disapprove proposed changes in the
nature of the Company's business so as to cause the Company to cease to be,
or to withdraw its election as, a BDC under the Investment Company Act;
(iii) approve or disapprove any proposed investment advisory contract or
disapprove and terminate any such existing contract; provided, however,
that such contracts are also approved by a majority of the members of the
Board of Managers; (iv) approve and ratify or disapprove and reject the
appointment of the independent accountants of the Company; provided,
however, that such appointment is approved by a majority of the members of
the Board of Managers; (v) approve or disapprove the appointment of each
successor Investment Adviser; and (vi) approve any other material matters
related to the business of the Company that the Investment Company Act
requires to be approved by the investors so long as the Company is a BDC
subject to the provisions of the Investment Company Act; provided, however,
that, prior to the exercise of any such right of approval, the Board of
Managers amend the Operating Agreement to reflect such additional voting
right.
57
Transferability of Units. A member may transfer Units only by
operation of law pursuant to the death, bankruptcy, insolvency or
dissolution of the member or otherwise, or with the written consent of the
Manager (which it may withhold in its sole and absolute discretion and will
grant, if at all, only in extenuating circumstances) or in connection with
a transfer to a family trust or another entity that does not result in a
change of beneficial ownership. Any permitted transferees will not,
however, be allowed to become substituted members in the Company without
the consent of the Manager, which consent may be withheld in the sole and
absolute discretion of the Manager. No member will have the right to
require the Company to redeem his, her or its Units. In addition, none of
the Company, the Manager or the Investment Adviser (nor any of their
respective affiliates) will make offers to repurchase Units, and Units will
not be traded on any securities exchange or other market.
The issuance of Units is not subject to any preemptive rights and
Units are not convertible into any other security of the Company.
LIABILITY OF MEMBERS
You will not be liable for any obligations of the Company in
excess of your capital, plus your share of undistributed profits, except
that you may be obligated to make capital contributions to the Company
pursuant to the Operating Agreement. However, if you receive a distribution
from the Company and after such distribution the liabilities of the Company
exceed the fair value of the Company's assets (and you had knowledge of
this fact at the time of the distribution) you may be required to return
such distribution to the Company. You will not have the right to a return
of your capital contribution except in accordance with the distribution
provisions of the Operating Agreement.
DUTY OF CARE OF THE BOARD AND MANAGER
The Operating Agreement provides that neither the members of the
Board of Managers nor the Manager (nor certain of its affiliates, among
others) shall be liable to the Company or the members for any loss or
damage occasioned by any act or omission in the performance of their
respective services as such in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of their obligations under
the Operating Agreement. The Operating Agreement also contains provision
for the indemnification, to the extent permitted by law, of the members of
the Board of Managers and the Manager (including certain of its affiliates,
among others) by the Company, but not by the members individually, against
any liability and expense to which any of them may become liable which
arises out of or in connection with the performance of their activities on
behalf of the Company. None of these persons will be personally liable to a
member for the repayment of any balance in such member's capital account
for contributions by such member to the capital of the Company or by reason
of any change in the Federal or state income tax laws applicable to the
Company or members. The rights of indemnification and exculpation provided
under the Operating Agreement do not provide for indemnification of a
member of the Board of Managers or the Manager against any liability,
including liability under Federal securities laws which, under certain
circumstances, impose liability even on persons that act in good faith, to
the extent, but only to the extent, that such indemnification would result
in violation of applicable law.
AMENDMENT OF THE OPERATING AGREEMENT
The Operating Agreement may be amended with the approval of (i)
the Board of Managers, including a majority of the independent members of
the Board of Managers, if required by the 1940 Act, (ii) the Manager, and
(iii) to the extent, but only to the extent, required by the 1940 act, a
majority, as defined in the 1940 Act, of the outstanding voting securities
of the Company. Certain amendments involving capital accounts and
allocations thereto and the modification of events causing dissolution of
the Company may not be made without the consent of any members adversely
affected thereby or unless each member has received notice of such
amendment and each member objecting to such amendment has been allowed a
reasonable opportunity to tender its entire interest for repurchase by the
Company. However, the Board of Managers may at any time, without the
consent of the other members, amend the Operating Agreement to (i) restate
the Operating Agreement, (ii) effect compliance with applicable law or
regulation, (iii) cure any ambiguity or to correct or supplement any
provision that may be inconsistent with another provision, provided such
change does not affect the rights of any member in any material respect, or
(iv) make such changes as may be necessary to assure the Company's
continuing eligibility to be classified for U.S. Federal income tax
purposes as a partnership which is not treated as a corporation under
Section 7704 (a) of the Code.
58
POWER OF ATTORNEY
By purchasing an interest in the Company, each member will appoint
the Manager and each member of the Board of Managers his or her
attorney-in-fact for purposes of filing required certificates and documents
relating to the formation and continuation of the Company as a limited
liability company under Delaware law or signing instruments effecting
authorized changes in the Company or the Operating Agreement or conveyances
and other instruments deemed necessary to effect the dissolution or
termination of the Company.
The power-of-attorney is a special power-of-attorney coupled with
an interest in favor of the Manager and each member of the Board of
Managers and as such is irrevocable and continues in effect until expressly
withdrawn or the investor ceases to be a member subject to and in
accordance with the Operating Agreement.
Term, Dissolution And Liquidation
The Company will be dissolved:
o On the tenth anniversary of the Termination Date, provided
that the Board of Managers may extend termination for up to
two additional periods of up to two years each; provided
further, that termination may be extended to such later date
with the approval of members holding at least two-thirds of
the total number of votes eligible to be cast;
o upon the affirmative vote to dissolve the Company by both
(1) the Board of Managers and (2) members holding at least
two-thirds of the total number of votes eligible to be cast
by all members;
o at the election of the Manager;
o upon the failure of members to elect successor members of
the Board of Managers at any meeting called by the Manager
when no members of the Board of Managers remain; or;
o as required by operation of law.
Upon the occurrence of any event of dissolution, the Manager, or a
liquidator appointed by the Board of Managers, is charged with winding up
the affairs of the Company and liquidating its assets. Items of income,
gain, loss, deduction and expense during the fiscal period including the
period of liquidation will be allocated as described in the section titled
"ALLOCATIONS AND DISTRIBUTIONS."
Upon the dissolution of the Company, its assets are to be
distributed (1) first to satisfy the debts, liabilities and obligations of
the Company, other than debts to members including actual or anticipated
liquidation expenses, (2) next to satisfy debts owing to members, and (3)
finally to members and the Manager proportionately in accordance with the
balances in their respective capital accounts. Assets may be distributed
in kind on a pro rata basis if the Manager or liquidator determines that
such a distribution would be in the interests of the Members in
facilitating an orderly liquidation.
SELLING ARRANGEMENTS
UST Financial Services Corp. has entered into a Selling Agent
Agreement with the Company pursuant to which the Selling Agent has agreed
to act as selling agent for the Units. This agreement is an agency
agreement only and places the Selling Agent under no obligation to use its
best efforts to sell the Units or otherwise solicit or promote transactions
in such Units. Units are available only to clients of U.S. Trust and its
affiliates and others approved by the Company who meet the Company's
investor suitability standards. The Selling Agent will not at any time
purchase any Units for its own account and its sole function is to promote
the sale of the Company's Units. The Selling Agent, the Investment Adviser
and the Manager are subsidiaries of U.S. Trust Corporation. The address of
the Selling Agent is 114 West 47th Street, New York, New York 10036-1532.
59
Pursuant to the Selling Agent Agreement, the Selling Agent may
enter into agreements with one or more sub-selling agents to arrange for
the sale of the Units in certain states. The Selling Agent agrees under the
Selling Agent Agreement that it shall remain fully responsible for the
performance of all its duties under the Selling Agent Agreement and that it
shall supervise the activities of each such sub-selling agent.
The Company has agreed to indemnify the Selling Agent against
certain civil liabilities, including liabilities under the federal
securities laws. However, such indemnification is subject to the provisions
of Section 17(i) of the Investment Company Act which provides, in part,
that no agreement shall contain a provision which protects or purports to
protect any person against any liability to such company or its security
holders to which it would otherwise be subject due to such person's
misfeasance, bad faith, or gross negligence in the performance of its
duties or reckless disregard of its obligations and duties under such
agreement.
LEGAL MATTERS
The validity of the Units offered hereby will be passed upon for
the Company by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York.
EXPERTS
The Statement of Assets and Liabilities of the Company included in
this Prospectus has been audited by Ernst & Young, LLP, independent
certified public accountants, as stated in their report included herein,
and is included herein in reliance upon such report given on their
authority as experts in auditing and accounting. Ernst & Young, LLP is
located at 787 Seventh Avenue, New York, New York 10019.
AVAILABLE INFORMATION
The Company is required to file reports with the Securities and
Exchange Commission. Information about the Company can be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 for information on the operation of the public reference
room. This information is also available on the SEC's Internet site at
http://www.sec.gov and copies may be obtained upon payment of a duplicating
fee by writing the Public Reference Section of the SEC, Washington, D.C.
20549-6009.
Investors should rely only on the information contained in this
prospectus. The Company has not, and the underwriter has not, authorized
any other person to provide investors with different information. If anyone
provides you with different or inconsistent information, you should not
rely on it. The Company is not, and the Selling Agent is not, making an
offer to sell these securities in any jurisdiction where the offer or sale
is not permitted. Investors should assume that the information appearing in
this prospectus is accurate as of the date on the front cover of this
prospectus only. The Company's business, financial condition, results of
operations and prospects may have changed since that date.
REPORTS TO MEMBERS
The Company will furnish to its members annual reports containing
audited financial statements and such other periodic reports as it may
determine to furnish or as may be required by law.
FINANCIAL STATEMENTS
[Statement of Assets and Liabilities to come]
TABLE OF CONTENTS
Page
FEE TABLE................................................................2
INVESTOR SUITABILITY STANDARDS...........................................3
PROSPECTUS SUMMARY.......................................................4
The Company...........................................................4
Investment Objective and Policies.....................................4
Management and Compensation...........................................5
The Offering..........................................................5
Minimum Investments...................................................6
Use of Proceeds.......................................................6
Risk Factors..........................................................6
Allocations, Distributions and Liquidation............................8
Tax Status of the Company.............................................9
THE COMPANY..............................................................9
INVESTMENT OBJECTIVE AND POLICIES.......................................10
General............................................................10
Investment Practices...............................................12
RISK FACTORS............................................................13
THE OFFERING............................................................19
Investor Suitability Standards.....................................19
USE OF PROCEEDS.........................................................20
MANAGEMENT..............................................................20
Investment Adviser; Compensation...................................20
The Manager........................................................21
Investment Operations..............................................22
Background.........................................................23
Code of Ethics.....................................................36
Board of Managers, Officers and Investment Professionals...........36
Board of Manager Compensation......................................40
Expenses of the Company............................................41
Control Persons....................................................41
Potential Conflicts of Interest....................................42
Custodian and Transfer Agent.......................................43
BROKERAGE ALLOCATION AND OTHER PRACTICES................................44
Portfolio Turnover.................................................44
REGULATION..............................................................47
VALUATION OF PORTFOLIO SECURITIES.......................................48
ALLOCATIONS AND DISTRIBUTIONS...........................................55
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS...............................55
ERISA CONSIDERATIONS....................................................55
Fiduciary Considerations...........................................55
Plan Assets Considerations.........................................55
The Acquisition and Holding of Company Data........................55
The Treatment of the Company's Underlying Assets Under ERISA.......56
DESCRIPTION OF UNITS....................................................57
Liability of Members...............................................58
Duty Care of The Board and Manager.................................58
Power of Attorney..................................................59
Summary Of Limited Liability Company Operating Agreement...........59
Term, Dissolution And Liquidation..................................59
SELLING ARRANGEMENTS....................................................59
LEGAL MATTERS...........................................................60
EXPERTS.................................................................60
AVAILABLE INFORMATION...................................................60
REPORTS TO MEMBERS......................................................60
FINANCIAL STATEMENTS....................................................60
Until April , 2000 (25 days after the date of this Prospectus),
all dealers effecting transactions in the Units, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligations of dealers to deliver a Prospectus when acting
as Underwriters and with respect to their unsold allotments or subscriptions.
PART C - OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Statement of Assets and Liabilities
2. Exhibits
(a) (1) Certificate of Formation of Limited Liability
Company dated February 18, 2000.
(2) Operating Agreement.*
(b) Not applicable.
(c) Not applicable.
(d) Specimen Certificate.*
(e) Not applicable.
(f) Not applicable.
(g) Form of Management Agreement among the Company,
United States Trust Company of New York and
U.S. Trust Company.*
(h) Form of Selling Agent Agreement between the Company and
UST Financial Services Corp.*
(i) Not applicable.
(j) (1) Form of Transfer Agency and Custodian Agreement
between the Company and Chase Manhattan Bank.*
(2) Form of Escrow Agreement among the Company, UST
Financial Services Corp. and United States Trust
Company of New York.*
(k) Not applicable.
(l) Opinion and consent of Skadden, Arps, Slate, Meagher
and Flom LLP.*
(m) Not applicable.
(n) Consent of Ernst & Young, LLP independent auditors.*
(o) Not applicable.
(p) Form of Subscription Agreement for investment in units
of the Company.*
(q) Not applicable.
(r) Ethics Code.*
* To be filed by amendment.
Item 25. MARKETING ARRANGEMENTS
See the Form of Selling Agent Agreement to be filed as Exhibit
2(h) as well as the Company's Prospectus under the caption "Selling
Arrangements."
Item 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, payable by
the Company in connection with the issuance and distribution of the
securities covered by this Registration Statement.
Securities and Exchange Commission fees......... [$ * ]
Blue Sky fees and expenses...................... [ * ]
Printing........................................ [ * ]
Legal fees and expenses......................... [ * ]
Independent auditors' fees and expenses......... [ * ]
Miscellaneous................................... [ * ]
------------
Total................... *
============
* To be provided by amendment.
Item 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
Upon conclusion of the public offering of the Company's units of
membership interest, it is anticipated that no person will be controlled
by or under common control with the Company.
Item 28. NUMBER OF HOLDERS OF SECURITIES AS OF FEBRUARY 15, 2000
Title of Class Number of Record Holders
- -------------- ------------------------
Units of Membership Interest, without par value 0
Item 29. INDEMNIFICATION
[The Advisory Agreement provides for indemnification by the Company
of the United States Trust Company of New York and U.S. Trust Company
(together, the "Investment Adviser") from any and all losses, claims,
damages, liabilities or expenses (including reasonable counsel fees and
expenses) not resulting from willful misfeasance, bad faith or gross
negligence in the performance by the Investment Adviser of its duties
thereunder or the reckless disregard of its obligations and duties under the
Advisory Agreement.
The Operating Agreement contains provisions for the
indemnification, to the extent permitted by law, of the Members of the
Board of Managers and the Manager (including certain of its affiliates,
among others) by the Company, but not by the members individually, against
any liability and expense to which any of them may become liable which
arises out of or in connection with the performance of their activities on
behalf of the Company. The rights of indemnification and exculpation
provided under the Operating Agreement do not provide for indemnification
of a member of the Board of Managers or the Manager against any liability,
including liability under Federal securities laws which, under certain
circumstances, impose liability even on persons that act in good faith, to
the extent, but only to the extent, that such indemnification would result
in violation of applicable law.
Pursuant to the Selling Agent Agreement, the Company has agreed to
indemnify selling agents against certain civil liabilities, including
liabilities under the federal securities laws.]
Item 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
(a) U.S. Trust Company:
U.S. Trust Company ("U.S. Trust") is a Connecticut state bank and
trust company located in Stamford, Connecticut. Set forth below are the names
and principal businesses of the directors and certain senior executive
officers of U.S. Trust, including those who are engaged in any other
business, profession, vocation or employment of a substantial nature.
<TABLE>
<CAPTION>
POSITION WITH TYPE OF
U.S. TRUST NAME PRINCIPAL OCCUPATION BUSINESS
- ------------- ---------------------------- -------------------------- -------------------
<S> <C> <C> <C>
Director Robert Bodine, Jr. Chairman of United States Asset
100 West Lancaster Avenue Trust Company in Pennsylvania Management,
Suite 200 Investment and
Wayne, PA 19087 Fiduciary
Services
Director Howard E. N. Wilson Chief Executive Officer of Asset
100 West Lancaster Avenue, United States Trust Company Management,
Suite 200 in Pennsylvania Investment and
Wayne, PA 19087 Fiduciary Services
Director Tucker H. Warner Co-Founder, Partner & Director Consulting Firm
The Nutmeg Financial Group LLC
1157 Highland Avenue
West Cheshire, CT 06903
Director Thomas C. Clark Managing Director, Asset
United States Trust Company of United States Trust Company of Management,
New York New York Investment and
11 West 54th Street Fiduciary
New York, NY 10019 Services
Director Maribeth S. Rahe Vice Chairman, Asset
United States Trust Company of United States Trust Company of Management,
New York New York Investment and
114 West 47th Street Fiduciary
New York, NY 10036 Services
Director Frederick B. Taylor Vice Chairman, Asset
United States Trust Company of United States Trust Company of Management,
New York New York Investment and
114 West 47th Street Fiduciary
New York, NY 10036 Services
Director Kenneth G. Walsh Executive Vice President, Asset
United States Trust Company of United States Trust Company of Management,
New York New York Investment and
114 West 47th Street Fiduciary
New York, NY 10036 Services
Director, William V. Ferdinand Managing Director & CIO Asset
Managing U.S. Trust Company Management,
Director & 225 High Ridge Road Investment and
CIO Stamford, CT 06905 Fiduciary
Services
Director, W. Michael Funck President & CEO Asset
President & U.S. Trust Company Management,
CEO 225 High Ridge Road Investment and
Stamford, CT 06905 Fiduciary
Services
</TABLE>
(b) United States Trust Company of New York:
United States Trust Company of New York ("U.S. Trust NY") is a
full-service state-chartered bank located in New York, New York. Set forth
below are the names and principal businesses of the directors and certain
senior executive officers of U.S. Trust NY, including those who are engaged
in any other business, profession, vocation or employment of a substantial
nature.
<TABLE>
<CAPTION>
POSITION WITH TYPE OF
U.S. TRUST NAME PRINCIPAL OCCUPATION BUSINESS
- ------------- -------------------------- ---------------------------- -------------------
<S> <C> <C> <C>
Director Samuel C. Butler Partner in Cravath, Swaine & Law Firm
Cravath, Swaine & Moore Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Director Peter O. Crisp Chairman of Venrock, Inc. Venture Capital
Room 5600
30 Rockefeller Plaza
New York, NY 10112
Director Antonia M. Grumbach Partner in Patterson, Belknap, Law Firm
Patterson, Belknap, Webb & Tyler Webb & Tyler LLP
1133 Avenue of the Americas
New York, NY 10036
Director, H. Marshall Schwarz Chairman of the Board & Chief Asset
Chairman of United States Trust Company of Executive Officer of U.S. Trust Management,
the Board and New York Corporation and United States Investment and
Chief 114 West 47th Street Trust Company of New York Fiduciary
Executive New York, NY 10036 Services
Officer
Director Phillipe de Montebello Director of the Metropolitan Art Museum
Metropolitan Museum of Art Museum of Art
1000 Fifth Avenue
New York, NY 10029-0198
Director Robert E. Denham Partner in Munger, Tolles & Olson Law Firm
Munger, Tolles & Olson LLP LLP
355 South Grand Avenue, 35th Fl.
Los Angeles, CA 90071
Director Carl H. Pforzheimer, III Managing Partner in Carl H. Broker-Dealer,
Carl H. Pforzheimer & Co. Pforzheimer & Co. Investment
650 Madison Avenue, 23rd Floor Adviser
New York, NY 10022
Director John Hoyt Stookey Chairman of Suburban Propane Petrochemicals
c/o Landmark Volunteers Pts. and Propane
749A Main Street
Route 7, Box 455
Sheffield, MA 01257
Director Robert N. Wilson Vice Chairman of the Board Health Care
Johnson & Johnson of Johnson & Johnson Products
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
Director Peter L. Malkin Chairman of Wien & Malkin LLP Law Firm
Wien & Malkin LLP
Lincoln Building
60 East 42nd Street 10165
Director and Maribeth S. Rahe Vice Chairman of U.S. Trust Asset
Vice Chairman United States Trust Company Corporation and United States Management,
of New York Trust Company of New York Investment and
114 West 47th Street Fiduciary
New York, NY 10036 Services
Director, Vice Frederick B. Taylor Vice Chairman of the Board and Asset
Chairman and United States Trust Company Chief Investment Officer of U.S. Management,
Chief of New York Trust Corporation and United Investment and
Investment 114 West 47th Street States Trust Company of New Fiduciary
Officer New York, NY 10036 York Services
Director, Jeffrey S. Maurer President and Chief Operating Asset
President and United States Trust Company Officer of U.S. Trust Management,
Chief of New York Corporation and United States Investment and
Operating 114 West 47th Street Trust Company of New York Fiduciary
Officer New York, NY 10036 Services
Director Phillip L. Smith Corporate Director and Trustee
P.O. Box 562
Newburg, NH 03255
Director Eleanor Baum Dean of Engineering at The Education
4 Arleigh Road Cooper Union for the
Great Neck, NY 11021 Advancement of Science & Art
Director Ruth A. Wooden President & Chief Executive Not-For-Profit
261 Madison Avenue Officer of The Advertising Public Service
11th Floor Council, Inc. Advertising
New York, NY 10016
Director David A. Olsen Chairman of the Board and Chief Insurance
Johnson & Higgins Executive Officer of Johnson & Broker, Benefit
125 Broad Street Higgins Consulting
New York, NY 10004
</TABLE>
Item 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Company will be maintained at the
office of United States Trust Company of New York, 114 West 47th Street,
New York, New York 10036.
Item 32. MANAGEMENT SERVICES
Except as described in the Prospectus under the caption
"Management", the Company is not a party to any management service related
contract.
Item 33. UNDERTAKINGS
The Company undertakes to suspend the offering of its units of
membership interest until it amends its Prospectus if (1) subsequent to the
effective date of its Registration Statement, the net asset value declines
more than 10 percent from its net asset value as of the effective date of
the Registration Statement or (2) the net asset value increases to an
amount greater than its net proceeds as stated in the Prospectus.
The Company additionally undertakes, pursuant to Rule 415 under
the Securities Act, as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)
(3) of the Securities Act;
(b) To reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement; and
(c) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such information
in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
has duly caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State
of New York, on the 23rd day of February, 2000.
EXCELSIOR PRIVATE EQUITY FUND III, LLC
By: /s/ David I. Fann
---------------------------------------
David I. Fann, Manager, President and
Co-Chief Executive Officer
(principal executive officer)
Each person whose signature appears below hereby appoints David I.
Fann his true and lawful attorney-in-fact, with full power of such
attorney-in-fact to sign on his behalf, individually and in each capacity
stated below, any and all amendments (including post-effective amendments)
to this Registration Statement and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ David I. Fann Manager, President and Co-Chief Executive February 23, 2000
- -------------------------- Officer (principal executive officer)
David I. Fann
/s/ Douglas A. Lindgran Manager, Co-Chief Executive Officer and Chief February 23, 2000
- -------------------------- Investment Officer
Douglas A. Lindgren (principal executive officer principal financial
and accounting officer)
/s/ James F. Dorment Manager and Corporate Secretary February 23, 2000
- --------------------------
James F. Dorment
</TABLE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
EXHIBITS
TO
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. |_|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 |X|
Amendment No. |_|
EXCELSIOR PRIVATE EQUITY FUND III, LLC
(Exact Name of Registrant as Specified in Charter)
==============================================================================
EXHIBIT INDEX
Exhibit No. Exhibit
- ----------- -------
(a) (1) Certificate of Formation of Limited Liability Company
dated February 18, 2000.
(2) Operating Agreement.*
(b) Not applicable.
(c) Not applicable.
(d) Specimen Certificate.*
(e) Not applicable.
(f) Not applicable.
(g) Form of Management Agreement among the Company,
United States Trust Company of New York and
U.S. Trust Company.*
(h) Form of Selling Agent Agreement between the Company and UST
Financial Services Corp.*
(i) Not applicable.
(j) (1) Form of Transfer Agency and Custodian Agreement
between the Company and Chase Manhattan Bank.*
(2) Form of Escrow Agreement among the Company, UST
Financial Services Corp. and United States Trust
Company of New York.*
(k) Not applicable.
(l) Opinion and consent of Skadden, Arps, Slate, Meagher and
Flom LLP.*
(m) Not applicable.
(n) Consent of Ernst & Young, LLP independent auditors.*
(o) Not applicable.
(p) Form of Subscription Agreement for investment in units of
the Company.*
(q) Not applicable.
(r) Ethics Code.*
* To be filed by amendment.
Exhibit (a)(1)
CERTIFICATE OF FORMATION
OF
EXCELSIOR PRIVATE EQUITY FUND III, LLC
FIRST: The name of the limited liability company is Excelsior
Private Equity Fund III, LLC.
SECOND: The Officers and initial Members of the Board of
Managers of the limited liability company shall be as follows:
NAME: TITLE:
David I. Fann Manager, President and
Co-Chief Executive Officer
Douglas A. Lindgren Manager, Co-Chief Executive Officer,
Chief Investment Officer and Chief Financial
Officer
James F. Dorment Manager and Corporate Secretary
THIRD: The address of its registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, County of New
Castle, City of Wilmington, Delaware 19801. The name of its registered
agent at such address is The Corporation Trust Company.
IN WITNESS WHEREOF, the undersigned has executed this Certificate
of Formation of Excelsior Private Equity Fund III, LLC on this 18th day of
February, 2000.
EXCELSIOR PRIVATE EQUITY FUND III, LLC
By: /s/ Nathan Bouley
-----------------------------------
Name: Nathan Bouley
Title: Authorized Person
