As filed with the Securities and Exchange Commission on October 11, 2000
Registration No. 333-38550
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
[X]REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X]Pre-Effective Amendment No. 2
and/or
[X]REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 2
EXCELSIOR VENTURE INVESTORS 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 VENTURE INVESTORS 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. IRENE S. GREENBERG, 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) 852-1367
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
===============================================================================
Proposed
Proposed Maximum
Title of Securities Amount Offering Maximum Amount of
Being Registered being Price Per Aggregate Registration
Registered Unit* Offering Price* Fee*
-------------------------------------------------------------------------------
Membership Interests 100,000 $500 $50,000,000 $13,200
(without par value) units
===============================================================================
*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.
CROSS REFERENCE SHEET
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PART A
ITEM NUMBER LOCATION IN PROSPECTUS
----------- ----------------------
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Item 1. Outside Front Cover.................... Outside Front Cover
Item 2. 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 Outside Front Cover; The Fund; Investment
Registrant............................. 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 Table of Contents of the Statement of Additional Information
Additional Information........
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PART B
ITEM NUMBER
<S> <C> <C>
Item 14. Cover Page............................. Outside Front Cover
Item 15. Table of Contents...................... Outside Front Cover
Item 16. General Information and History The Fund
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 OtherServices.. 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>
PRELIMINARY PROSPECTUS
Subject to completion, dated October 11, 2000
EXCELSIOR VENTURE INVESTORS III, LLC
$[ ]
Units of Membership Interest
Minimum Subscription -- $25,000
Excelsior Venture Investors III, LLC, or the "Fund," is a newly
organized, non-diversified, closed-end management investment company. Our
investment objective is to achieve long-term capital appreciation. We will
pursue our objective by investing in Excelsior Venture Partners III, LLC
(the "Portfolio"), a business development company that invests in a
portfolio of 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. See
"The Fund" and "Investment Objective and Policies."
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 including
the statement of additional information dated October , 2000, incorporated
by reference into this prospectus, has been filed with the Securities and
Exchange Commission (the "Commission") and is available upon written or
oral request without charge. You can review the table of contents of the
statement of additional information on page 74 of this prospectus. In
addition, the Commission maintains a Web site (http://www.sec.gov) that
contains material incorporated by reference, the statement of additional
information and other information regarding registrants that file
electronically with the Commission. You may also request a free copy by
writing or calling the Fund at c/o United States Trust Company of New York,
114 West 47th Street, New York, New York 10036-1532, (212) 852-3125. You
may request a copy of the statement of additional information at no charge,
by calling PFPC Inc. at 1-877-238-1968.
AN INVESTMENT IN THE FUND WILL BE ILLIQUID UNTIL ITS UNDERLYING
INVESTMENTS ARE LIQUIDATED. INVESTORS MUST BE WILLING AND ABLE TO BEAR THE
RISKS OF AN INVESTMENT IN THE FUND UNTIL THAT TIME.
THESE ARE SPECULATIVE SECURITIES. YOU SHOULD INVEST ONLY IF YOU CAN
AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON
PAGE 18.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE. THE FUND IS NOT AVAILABLE FOR
INVESTMENT BY RESIDENTS IN THE STATES OF ALABAMA, ARKANSAS, KANSAS, MAINE,
MASSACHUSETTS, MISSISSIPPI AND MISSOURI. SEE APPENDIX A FOR ADDITIONAL
INFORMATION FOR RESIDENTS OF CERTAIN STATES.
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==========================================================================================
PRICE TO PROCEEDS
PUBLIC SALES LOAD(2) TO FUND1
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit (50 Unit Minimum) $[500] None $[500]
------------------------------------------------------------------------------------------
Total Minimum ([ ] Units) $[ ] None $[ ]
------------------------------------------------------------------------------------------
Total Maximum ([ ] Units) $[ ] None $[ ]
==========================================================================================
</TABLE>
(1) The Fund expects to incur organizational and offering expenses of
approximately $___. [Charles Schwab & Co., Inc. the Fund's principal
distributor, has agreed to pay the Fund's organizational costs
estimated to be $[ ] in the event that the Fund receives subscriptions
totaling less than $[ ]. If the Fund receives subscriptions totaling
$[ ] or more, the Fund will pay its own organizational expenses. Your
share of organizational and offering costs will be deducted from your
capital contribution.]
(2) The Investment Adviser or an affiliate has agreed to compensate the
principal distributor from its own assets, not the assets of the Fund,
in an amount equal to 0.02% of the price to the public of all Units
subscribed for, and has agreed to compensate the principal distributor
for the sale of the Fund's Units and the provision of ongoing investor
services in an amount equal to the annual rate of 0.45% of the average
quarterly net asset value of all Units held by investors introduced to
the Fund by the principal distributor, subject to reduction after five
years and elimination upon all such fees totaling 6.5% of the gross
proceeds received by the Fund from this offering.
The date of this prospectus is October ___, 2000.
Units are made available through Charles Schwab & Co., Inc., the
Fund's principal distributor (the "Distributor"). The first subscription
closing will be held on or about the fifth business day after receipt by
the Fund of subscriptions totaling $[ ]. The Fund may continue to offer
Units and accept subscriptions for such Units from time to time at
subsequent subscription closings until December 31, 2000, subject to
extension. If the minimum subscription of $[ ] has not been reached by such
date, or extension, the offering will terminate. See "The Offering." The
Fund reserves the right to withdraw, cancel or modify the offering and to
reject any subscription in whole or in part. The Fund will not accept
proceeds until the minimum subscription of [ ] has been obtained. Payments
transmitted by subscribers to the Fund, or to the selling agents, for
investment in the Fund prior to the applicable closing date will be
deposited in an interest-bearing bank escrow account with PFPC Inc. pending
closing.
The Fund expects to invest substantially all of the proceeds of this
offering in the Portfolio within 30 days of the Termination Date (expected
to be December 31, 2000, subject to extension). See "The Offering." Pending
investment in the Portfolio and for short-term cash management purposes,
the Fund may invest in short-term U.S. Government securities. U.S. Trust
Company serves as investment adviser to the Fund (the "Fund's Adviser") and
will be responsible for investing assets not invested in the Portfolio.
-------------------------------------------------------------------------------
Units may be purchased only by persons who represent to the Portfolio
that the value of their total assets (exclusive of their principal
residence) less their total liabilities is at least $500,000, that the
amount they are subscribing for does not exceed 10% of their total
assets less their total liabilities and who make the other
representations included in the Subscription Agreement (attached
hereto as Appendix C) to be entered into by each investor.
-------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
FEE TABLE....................................................................5
PROSPECTUS SUMMARY...........................................................7
THE FUND....................................................................15
INVESTMENT OBJECTIVE AND POLICIES...........................................15
RISK FACTORS................................................................19
THE OFFERING................................................................26
USE OF PROCEEDS.............................................................28
MANAGEMENT..................................................................28
BROKERAGE ALLOCATION AND OTHER PRACTICES....................................51
REGULATION..................................................................52
VALUATION OF PORTFOLIO SECURITIES...........................................54
CAPITAL ACCOUNTS, ALLOCATIONS AND DISTRIBUTIONS.............................55
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS...................................57
ERISA CONSIDERATIONS........................................................61
DESCRIPTION OF UNITS........................................................65
SELLING ARRANGEMENTS........................................................69
LEGAL MATTERS...............................................................70
INDEPENDENT AUDITORS........................................................70
AVAILABLE INFORMATION.......................................................70
REPORTS TO MEMBERS..........................................................70
FINANCIAL STATEMENTS........................................................70
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION................78
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)
Management Fees........................................... [2.00%]**
Other Expenses............................................ [ %]***
Total Annual Expenses..................................... [ %]
*A distribution fee equal to 0.02% of the total of all subscriptions
received in this offering will be paid by the Fund's Adviser or an
affiliate. The Fund's Adviser or an affiliate will also pay the Distributor
an ongoing fee, to the extent that investors are introduced to the Fund by
the Distributor, for the sale of Units and the provision of ongoing
investor services in an amount equal to the annual rate, through the fifth
anniversary of the final subscription closing date of 0.45% of the average
quarterly net asset value of all outstanding Units held by investors
introduced to the Fund by the Distributor and at the annual rate of 0.22%
thereafter, subject to elimination upon all such fees totaling 6.5% of the
gross proceeds received by the Fund from this offering.
**The Fund invests in the Portfolio. The Fund pays no advisory fee on
assets invested in the Portfolio. Pending investment of its assets in the
Portfolio, the Fund will invest in U.S. Government securities. The Fund
will pay the Fund's Adviser a fee of 0.1% of the Fund's net assets that are
not represented by the Fund's investment in the Portfolio. The Portfolio's
management fee through the fifth anniversary of the Portfolio's final
subscription closing date (not later than December 31, 2000, subject to
extension), will be payable at the annual rate of 2.00% of the Portfolio's
average quarterly net assets, determined as of the end of each fiscal
quarter. Thereafter, the Portfolio's management fee will be payable at the
annual rate of 1.00% of the Portfolio's average quarterly net assets,
determined at the end of each fiscal quarter. The Portfolio's Investment
Adviser has agreed to waive this fee during the subscription period, which
will end on the final subscription closing date (not later than December
31, 2000, subject to extension). The Investment Adviser is also entitled to
an "Incentive Carried Interest" from the Portfolio in an amount equal to
20% of the Portfolio'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
Portfolio's investments). See "Management" and "Capital Accounts,
Allocations and Distributions."
***"Other Expenses" are based on estimated amounts for the current fiscal
year, and include among other things, administration fees, legal fees, the
independent auditor's fees, printing costs and fees payable to the
independent managers.
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EXAMPLE
-------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
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You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return:
Example (1)................................................. $[ ] $[ ] $[ ] $[ ]
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THANTHOSE SHOWN IN THE EXAMPLES.
The Fee Table summarizes the aggregate expenses of the Fund and the
Portfolio in order to assist the investor in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. To the extent that the Portfolio invests in private funds, you
will also indirectly through the Fund 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 "Capital Accounts, Allocations and Distributions."
------------------
(1) Assumes Portfolio management fee of 2.00% of the Portfolio's net
assets in years 1-5 and 1.00% thereafter and other expenses of [ ]% of the
Fund's and the Portfolio's net assets and includes the Incentive Carried
Interest paid by the Portfolio. 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) EXAMPLE 2
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
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You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return:
Example .................................................... $[ ] $[ ] $[ ] $[ ]
</TABLE>
Assumes Portfolio management fee of 2.00% of the Portfolio's net assets in
years 1-5 and 1.00% thereafter and other expenses of [ ]% of the Fund's and
the Portfolio's net assets and includes the Incentive Carried Interest paid
by the Portfolio. 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.
PROSPECTUS SUMMARY
This summary is qualified in its entirety by reference to the more
detailed information included in this prospectus, the statement of
additional information and to the Fund's operating agreement (the
"Operating Agreement") attached hereto as Appendix B.
THE FUND
The Fund is a Delaware limited liability company formed on June 1,
2000. We are registered as a closed-end, non-diversified management
investment company. We provide investors with the opportunity to
participate, with a minimum investment of $25,000, in a portfolio of 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 Fund. 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. See "The Fund," "Risk
Factors," "The Offering" and "Description of Units."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve long-term capital
appreciation. Current income is not an objective. The Fund currently
intends to achieve its objective by investing its assets in Excelsior
Venture Partners III, LLC (the "Portfolio"), a separate, closed-end,
non-diversified investment company that has elected to be treated as a
business development company, or "BDC," under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Fund and the Portfolio
share substantially the same investment objective and policies. The
Portfolio 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.
The Portfolio also intends to invest to a lesser extent 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." A company in which a
Direct Investment is made is considered a "Portfolio Company." Pending
investment, for operating purposes and for temporary or emergency purposes,
the Portfolio will make liquid investments in short-term securities.
The Portfolio currently expects to make investments in companies
engaged in businesses that are consistent with the general investment
philosophy used by U.S. Trust Corporation and its affiliated banks ("U.S.
Trust") in its investment management advisory business. With the approval
of its board of managers, the Portfolio may change this policy. U.S. Trust
follows a long-term investment philosophy and uses a growth strategy and a
transaction value strategy to guide investment decision making. The growth
strategy seeks to identify industries and companies that can provide
solutions to or otherwise benefit from markets that are growing in response
to underlying trends. The transaction value strategy involves a comparison
of a company's real underlying asset value with similar assets changing
ownership in the market. It is based on a belief that differences between a
company's real asset value and the price of its shares correct over time.
U.S. Trust applies these strategies together with a focus on longer-term
investment themes that U.S. Trust believes represent long-term trends. U.S.
Trust currently believes that the following themes represent strong and
inexorable trends:
o Communications and Information
o Productivity Enhancers
o Infrastructure Development
o Early Life Cycle Companies
o Demographics/Rising Living Standards
o Globalization Forces
o Business and Industrial Restructuring
Each of these is described in greater detail under the caption "Investment
Objective and Policies - Investment Strategies." Under current market
conditions, the Investment Adviser expects to emphasize the technological
innovations that are driving the new economy, with specific focus on
information technology, communications, life sciences and information
services.
We do not intend to borrow to invest in the Portfolio. The Portfolio
may from time to time borrow funds in an amount up to 25% of its 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. The Portfolio does
not intend to borrow in order to make the initial investment in a company.
The Portfolio will not borrow to pay the management 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."
MANAGEMENT AND COMPENSATION
U.S. Trust Company serves as investment adviser to the Fund (the
"Fund's Adviser"). The Fund's Adviser will be responsible for investing
assets not invested in the Portfolio. Such investments will be in
short-term U.S. Government securities. The Fund's Adviser will also be
responsible for disposing of any assets received in kind from the
Portfolio.
U.S. Trust Company and United States Trust Company of New York serve
as "Investment Adviser" and "Investment Sub-Adviser" to the Portfolio,
respectively. The Investment Adviser and Investment Sub-Adviser are
responsible pursuant to the Investment Advisory and Investment Sub-Advisory
agreements for identifying, evaluating, structuring, monitoring and
disposing of the Portfolio's investments and providing, or arranging for
third parties to provide, any and all management and administrative
services reasonably necessary for the operation of the Portfolio and the
conduct of its business.
The Investment Adviser or its affiliates have served as the
investment advisers 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 investment management personnel of the
Investment Adviser and Investment Sub-Adviser consist of the same persons
that perform the investment management functions for Fund I and Fund II.
The Portfolio's investment objective and policies are similar to those of
Fund I and Fund II, although the Investment Adviser and Investment
Sub-Adviser expect to employ an investment strategy more similar to that of
Fund II. As of July 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 July 31, 2000, Fund II
had made investments in 20 Portfolio Companies and 13 Private Funds with an
aggregate of approximately $176 million of invested and/or committed
capital.
The Fund will not pay the Fund's Adviser an investment advisory fee
on assets invested in the Portfolio. The Fund will pay the Fund's Adviser a
fee equal to 0.1% of the Fund's net assets that are not represented by the
Portfolio. Through the fifth anniversary of the Portfolio's final
subscription closing date, the Portfolio will pay the Investment Adviser a
management fee at an annual rate equal to 2.00% of the Portfolio's average
quarterly net assets, determined as of the end of each fiscal quarter.
Thereafter, the management fee paid by the Portfolio will be at an annual
rate of 1.00% of the Portfolio's average quarterly net assets, determined
as of the end of each fiscal quarter. From this fee the Investment Adviser
will pay the investment advisory fee of the Investment Sub-Adviser. The
Investment Adviser has agreed to waive its management fee for the Portfolio
during the subscription period, which will end on the final subscription
closing date (not later than December 31, 2000, subject to extension).
The Investment Adviser also will be entitled to allocations and
distributions from the Portfolio equal to the Incentive Carried Interest.
The Incentive Carried Interest is an amount equal to 20% of the Portfolio'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 calendar year. The Investment Adviser's allocations and distributions
from the Portfolio will be made net of, respectively, all prior allocations
and all prior distributions made of the Incentive Carried Interest to the
Investment Adviser.
Investors in the Fund will indirectly bear their pro rata portion of
the fees payable by the Portfolio to the Investment Adviser.
PFPC Inc. (the "Administrator"), performs certain administration,
accounting and investor services for the Portfolio and the Fund. In
consideration for these services, the Portfolio and the Fund pay the
Administrator annual fees based upon their aggregate net assets, subject to
a minimum monthly fee, and will reimburse the Administrator for certain of
the Administrator's expenses.
THE OFFERING
The Fund is offering investors the opportunity to subscribe to make
capital contributions to the Fund in exchange for membership interests in
the Fund. The Fund is offering up to 100,000 units of membership interests
at a price per unit of $500 (the "Units"). Units are made available through
Charles Schwab & Co., Inc. as principal distributor (the "Distributor").
The Fund's Adviser or an affiliate will pay the Distributor from its own
assets an amount equal to 0.02% of the total of all subscriptions received
in this offering. Units may be sold by the Distributor to investors through
financial intermediaries acting as broker or agent ("Selling Agent") for
their customers. The Fund's Adviser or an affiliate may compensate from its
own assets Selling Agents who sell Units of the Fund to investors. The
Fund's Adviser or an affiliate will, to the extent that investors are
introduced to the Fund through the Distributor, pay the Distributor an
ongoing fee for the sale of Units and the provision of ongoing investor
services in an amount equal to the annual rate through the fifth
anniversary of the final subscription closing date of 0.45% of the average
quarterly net asset value of all outstanding Units held by investors
introduced to the Fund by the Distributor and at the annual rate of 0.22%
thereafter, subject to elimination upon all such fees totaling 6.5% of the
gross proceeds received by the Fund from this offering. The offering will
terminate on December 31, 2000, subject to extension by the Board of
Managers to a date not later than May 11, 2001 (the "Termination Date"). If
a minimum of $ [ ] 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.
We expect to have our first closing (the "first subscription
closing") approximately five business days after we have received
subscriptions totaling at least $ [ ]. The Fund may continue to accept
subscriptions for Units from time to time at subsequent closings (each a
"subsequent subscription closing") until the Termination Date.
Each subscriber will be required to complete, execute and deliver to
the Fund an executed copy of a subscription agreement attached hereto as
Appendix C (the "Subscription Agreement"), which will form a binding
contract of the investor. Units may be purchased only by persons who
represent to the Portfolio that the value of their total assets (exclusive
of their principal residence) less their total liabilities is at least
$500,000, that the amount they are subscribing for does not exceed 10% of
their total assets less their total liabilities and who make the other
representations included in the Subscription Agreement to be entered into
by each investor. Amounts paid by subscribers to the Fund, or to the
Selling Agents, for investment in the Fund, prior to the applicable closing
date will be deposited in an interest-bearing bank escrow account with PFPC
Inc. pending each closing. Any checks should be made payable to PFPC Inc.,
as "Escrow Agent," and must be transmitted by Selling Agents directly to
the Escrow Agent by noon of the next business day after receipt. The Fund
will not accept proceeds until the minimum subscription of [ ] has been
obtained. Organizational and offering costs of approximately [ ], have been
or will be incurred by the Fund. All or a portion of such costs have been
or may be advanced by the Fund's Adviser or an affiliate and will be
reimbursed by the Fund. [The Distributor has agreed to pay the Fund's
organizational costs, estimated to be [ ], in the event that the Fund
receives subscriptions totaling less than [ ]. If the Fund receives
subscriptions totaling [ ] or more, the Fund will pay its own
organizational expenses. Each investor's share of organizational and
offering costs will be deducted from his or her capital account. See "The
Offering."
The Fund will not commence accepting subscriptions until the
Portfolio has set a date for its first closing. The Fund intends to notify
you of the date upon which it will begin accepting subscriptions. Any
subscriptions received before such date will be returned promptly. Pursuant
to the Subscription Agreement, your subscription amount is required to be
paid on or before the final subscription closing date (not later than
December 31, 2000, subject to extension). At the first subscription closing
the Fund will issue one Unit for each $500 of capital contribution.
Thereafter, Units will be issued at net asset value.
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
The Fund intends to invest the net proceeds of this offering in units
of membership interest ("Portfolio Units") in Excelsior Venture Partners
III, LLC (the "Portfolio"). The Fund expects to invest substantially all of
the proceeds of this offering in the Portfolio within 30 days of the
Termination Date (expected to be December 31, 2000, subject to extension).
We anticipate that there will be a significant period of time (up to four
years) before the Portfolio becomes fully invested. Although the Portfolio
intends to invest or commit to invest more than 50% of the proceeds from
the offering in Venture Capital Investments within the earlier of (i) two
years after the final subscription closing date and (ii) two and one-half
years after the commencement of this offering, a delay is common for
business development companies such as the Portfolio because of the
competition for investments in entities that meet the requirements for
"qualifying assets" under the Investment Company Act. See "Use of
Proceeds."
RISK FACTORS
These are speculative securities. Units of the Fund 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 or person.
RISKS RELATED TO THE FUND AND THE PORTFOLIO
UNSPECIFIED USE OF PROCEEDS. Since the Portfolio in which the Fund
invests has not identified the particular uses for the net proceeds from
this offering, prospective investors must rely on the ability of the
Investment Adviser and Investment Sub-Adviser to identify and make
portfolio investments consistent with the Fund's and the Portfolio's
investment objective.
LACK OF OPERATING HISTORY. While the key personnel of the Investment
Adviser, the Investment Sub-Adviser and their affiliates have considerable
experience in venture capital and private equity investing, the Fund and
the Portfolio have recently been formed and have no operating history of
their own upon which an investor may base an evaluation of the likely
performance of the Fund or the Portfolio.
MINIMUM PROCEEDS; PORTFOLIO DIVERSIFICATION. To the extent that the
Portfolio makes fewer investments, it may be subject to greater risks from
developments adversely affecting one or a limited number of issuers. If the
Portfolio receives only the minimum amount of subscriptions, it will have
fewer assets to invest and will likely acquire fewer investments than it
would if it received more subscriptions. This would increase the Fund's and
the Portfolio's volatility and risk.
RELIANCE ON THE INVESTMENT ADVISER AND THE INVESTMENT SUB-ADVISER.
The investment decisions of the Portfolio will be made by the Investment
Adviser and the Investment Sub-Adviser. Investors will have no right to
take part in the management of the Fund or the Portfolio.
INCENTIVE CARRIED INTEREST. The Incentive Carried Interest is based
on 20% of the net realized capital gain on Direct Investments made by the
Portfolio and may create an incentive for the Investment Adviser to cause
the Portfolio to make investments that are riskier or more speculative than
would be the case in the absence of the Incentive Carried Interest.
POTENTIAL CONFLICTS OF INTEREST. The Investment Adviser and its
affiliates may be subject to various conflicts of interest in connection
with their relationships and transactions with the Fund and the Portfolio.
These include conflicts associated with:
o the Incentive Carried Interest;
o investment opportunities;
o allocating management time and services;
o relationships with Portfolio Companies; and
o affiliated transactions.
See "Risk Factors - Potential Conflicts of Interest."
LIABILITIES OF MEMBERS. You will not be liable for any obligations of
the Fund in excess of your capital account balance, plus your share of
undistributed profits. However, if you receive a distribution from the Fund
and after such distribution the liabilities of the Fund exceed the fair
value of the Fund'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
Fund. The Fund has no intention of making such distributions. You will not
have the right to a return of your subscription amount except in accordance
with the distribution provisions of the Operating Agreement.
NO PUBLIC OR OTHER MARKET FOR UNITS. The Fund 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 Fund (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 Fund without the consent of the Fund,
which consent may be withheld in our sole and absolute discretion. No
member will have the right to require the Fund to redeem his, her or its
Units. In addition, neither the Fund nor the Fund's Adviser (nor any of
their respective affiliates) will make a market in or otherwise 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 FUND WILL BE ILLIQUID
UNTIL ITS UNDERLYING INVESTMENTS ARE LIQUIDATED. INVESTORS MUST BE WILLING
AND ABLE TO BEAR THE RISKS OF AN INVESTMENT IN THE FUND UNTIL THAT TIME.
TAX STATUS. At the first subscription closing, the Fund will receive
an opinion of its counsel to the effect that, under current law and based
on certain assumptions and representations, the Fund 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. The Portfolio will receive a
similar opinion. No ruling has been or will be sought from the Internal
Revenue Service ("IRS") regarding the status of either the Fund or the
Portfolio as a partnership. An opinion of counsel is not binding on the IRS
or any court. If the Fund or the Portfolio were treated as a publicly
traded partnership or otherwise treated 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 Fund and
the Portfolio."
DISTRIBUTIONS IN KIND. The Portfolio may make distributions of
securities or other property in kind. To the extent that the Fund receives
distributions in kind from the Portfolio, the Fund intends ordinarily to
retain such assets until the Fund's Adviser determines that it is
advantageous to dispose of such assets. The Fund may, however, also make
distributions in kind. To the extent that the Fund 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 Fund
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 Portfolio 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 Portfolio from investing in potentially attractive
situations that might otherwise be available. At the same time, the
Portfolio's election to be treated as a business development company
exempts it from certain provisions of the Investment Company Act. As a
result, the Portfolio operates differently than a registered investment
company and is subject to different and potentially greater risks as
compared to a registered investment company. See "Regulation."
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 Portfolio 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 Portfolio's term.
Securities laws, contractual limitations and practical limitations may
inhibit the Portfolio's ability to sell, distribute or liquidate its
investments in Portfolio Companies and could reduce the amount of proceeds
that might otherwise be realized. The Fund's investment in the Portfolio
will also be illiquid in that there are substantial restrictions as to
transfer of Portfolio Units.
NEED FOR FOLLOW-ON INVESTMENTS. There is no assurance that the
Portfolio 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 Portfolio to increase its participation in
a successful operation.
COMPETITION FOR INVESTMENTS. The Portfolio 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 Portfolio may be an investor.
INVESTMENT IN COMPANIES DEPENDENT UPON NEW TECHNOLOGIES. Under
current market conditions, the Portfolio plans to focus on investments in
companies that rely significantly on technological events or advances in
their product development, production or operations. The value of the
Portfolio Units may be susceptible to factors affecting technology and
technology-related industries and to greater risk and market fluctuation
than an investment in a fund that invests in a broader range of portfolio
securities.
BORROWING. The Portfolio may borrow for investment and other
purposes. The use of leverage even on a short-term basis could have the
effect of magnifying increases or decreases in the Portfolio's net asset
value and could result in lenders placing restrictions on the Portfolio
including reserve requirements or operating restrictions that would limit
the ability of the Investment Adviser to control investments or
refinancings and the ability of the Portfolio to make distributions.
LACK OF DIVERSIFICATION. The Fund and the Portfolio intend to operate
as non-diversified investment companies within the meaning of the
Investment Company Act. A non-diversified company may invest to a greater
degree in fewer issuers than may a diversified company. As a result, the
Fund and the Portfolio will be more exposed to developments adversely
affecting only one or a few companies that it has invested in. The net
asset value of a non-diversified company may be more volatile than that of
a diversified company.
ALLOCATIONS, DISTRIBUTIONS AND LIQUIDATION
The Fund has been formed as a Delaware limited liability company and
as such is governed by Delaware law and an operating agreement that defines
many of the rights and responsibilities of the Board of Managers and
members. A copy of the Operating Agreement is attached hereto as Appendix
B. Investors in the Fund will become members in the Fund, 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. All allocations and
distributions made by the Fund will generally be made pro rata in
proportion to each member's interest in the Fund.
The Fund will invest in and become a member of the Portfolio, which
will similarly establish a capital account in the Portfolio for the Fund.
The Portfolio will make allocations and distributions to its members,
including the Fund, as set forth below.
ALLOCATIONS. The income, gain, loss, deduction and expense of the
Portfolio generally will be determined and allocated as of the end of each
tax year (typically December 31) to reflect the economic interests of its
members and the Investment Adviser.
Portfolio allocations generally will be made in the following order:
o gains will be allocated to the Investment Adviser until the
cumulative amount of all gain that has been allocated to the
Investment Adviser from the commencement of operations equals the
Incentive Carried Interest calculated through the period for
which the allocation is being made; then
o all remaining items of income, gain, loss, deduction and expense
will be allocated to the members pro rata in accordance with
their invested capital.
DISTRIBUTIONS. The Portfolio will distribute all cash that the
Investment Adviser does not expect to use in the operation of the
Portfolio. The Portfolio will consider making such distributions at least
annually but, as described below, investors should not expect distributions
of cash or property during the first several years of the Portfolio's
operations. Each year, the Investment Adviser generally will be entitled to
a distribution of the Incentive Carried Interest. The members generally
will be entitled to all amounts remaining for distribution pro rata in
accordance with their invested capital. The Portfolio may make
distributions in kind of its property, which generally would be treated for
purposes of the Portfolio'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 Portfolio's valuation
procedures.
The Fund will distribute all cash that the Fund's Adviser does not
expect to use in the operation of the Fund. Due to the nature of the
Portfolio's investments, investors should not expect distributions of cash
or property during the first several years of the Fund's operations. The
Fund will not reinvest income from its investments or the proceeds from the
sale of its investments. The Fund does not intend to make any distribution
if, after making such distribution, the liabilities of the Fund would
exceed the fair value of the Fund's assets.
LIQUIDATION. The Fund intends to liquidate and dissolve after the
Portfolio has been liquidated and has distributed all of its assets. The
duration of the Portfolio will be ten years from its final subscription
closing; however, the board of managers of the Portfolio 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 of the Portfolio who represent
66 2/3% of the Portfolio's outstanding Units may determine to extend the
term of the Portfolio. See "Description of Units - Term, Dissolution and
Liquidation."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Both the Fund and the Portfolio intend to be treated as partnerships
for federal income tax purposes. See "Certain Federal Income Tax
Considerations - Tax Status of the Fund and the Portfolio." Thus, 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
Fund items of income, gain, loss, deduction and expense for the taxable
year of the Fund ending within or with each taxable year of the member,
regardless of whether the member has received any distributions from the
Fund. Such Fund items will generally include the Fund's allocable share of
corresponding items of the Portfolio. It is possible that a member's
federal income tax liability with respect to his, her or its allocable
share of Fund earnings in a particular year could exceed the distributions
to the member for the year, thus giving rise to an out-of-pocket payment by
the member.
THE FUND
The Fund is a newly organized, non-diversified, closed-end management
investment company that has registered its securities under the Securities
Act of 1933 and has registered as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act").
The Fund intends to invest its assets in Excelsior Venture Partners III,
LLC (the "Portfolio"). The Fund and the Portfolio share substantially the
same investment objective and policies. The Fund 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 Fund. Pending
investment in the Portfolio, the Fund will invest its assets in U.S.
Government securities having a remaining maturity of one year or less.
The Fund was organized as Excelsior Venture Partners Fund III, LLC, a
Delaware limited liability company, on June 1, 2000. On August 30, 2000,
the Fund amended its certificate of formation to change its name from
Excelsior Venture Partners Fund III, LLC to Excelsior Venture Investors
III, LLC. Pursuant to the Operating Agreement, the business and affairs of
the Fund are overseen by a four member Board of Managers, three of whom are
not "interested persons" of the Fund or its affiliates as that term is
defined in the Investment Company Act. The Board of Managers is analogous
to a board of directors of a corporation. U.S. Trust Company serves as
investment adviser to the Fund. The Fund's and the Portfolio's principal
offices are located at 114 West 47th Street, New York, New York 10036, and
the telephone number of the Fund is (212) 852-3125.
The Portfolio is a newly organized, non-diversified, close-end
management investment company that has elected to be treated as a business
development company under the Investment Company Act. The Portfolio was
organized as a Delaware limited liability company on February 18, 2000. The
board of managers and principal officers of the Portfolio also serve as the
Board of Managers and principal officers of the Fund. See "Management -
Board of Mangers, Officers and Investment Professionals."
INVESTMENT OBJECTIVE AND POLICIES
GENERAL
The investment objective of the Fund is to seek long-term capital
appreciation. The Fund currently seeks to achieve its investment objective
by investing its assets in Excelsior Venture Partners III, LLC, a separate
non-diversified, closed-end, management investment company that has elected
to be treated as a business development company under the Investment
Company Act.
In the event that the Fund receives distributions of securities in
kind from the Portfolio, the Fund may, but generally does not expect to,
distribute such securities in kind. To the extent that it does not
distribute such securities in kind, it will conduct an orderly distribution
of such securities under the direction and discretion of the Fund's
Adviser. The Fund's Adviser will seek to maximize the value to the Fund
from such liquidations, although the Fund will not be required to liquidate
such securities within any stated period of time. The Fund will not
reinvest in additional Portfolio Units or other equity securities the cash
distributions it receives from the Portfolio or the cash proceeds it
receives from the disposition of securities distributed to it in kind, but
will distribute such cash in accordance with its distribution policies.
Pending distribution, cash may be invested in short-term U.S. Government
securities.
The Fund and the Portfolio share substantially the same investment
objective and policies. The Portfolio 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, the Portfolio also intends 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 Portfolio
will invest 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 "Short-Term Investments"). Although the Portfolio's objective
is to seek long-term capital appreciation, there is no minimum holding
period for the Portfolio's investments and the Portfolio may sell any
investment at any time that the Investment Adviser or Investment
Sub-Adviser believes it is advantageous to do so. The disposition of Direct
Investments requires the approval of the Portfolio's board of managers.
As a BDC, the Portfolio 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 Portfolio may maintain up to 30% of
its assets in non-qualifying assets; however, the Portfolio 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 "Regulation."
Venture Capital Investments
The Portfolio will invest primarily in Venture Capital Investments.
The Portfolio may also commit to invest funds in a Venture Capital
Investment beyond the initial investment or guarantee the obligations of a
Venture Capital Investment. The Portfolio will attempt to reduce the risks
inherent in private equity investing by investing in a portfolio of
companies involved in different industries and different stages of
development, through the utilization of professional management provided by
the Investment Adviser and the Investment Sub-Adviser in the selection of
private equity investments and through the active monitoring of such
investments.
Other Private Equity Investments
Subject to the limitations of the Investment Company Act, the
Portfolio may invest in Private Funds, International Venture Capital
Investments and Private Placements in Public Companies (collectively,
"Other Private Equity Investments"). The Portfolio 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. The Portfolio does not
expect to invest more than 10% of its total assets in any one Other Private
Equity Investment. Neither the Investment Adviser nor the Investment
Sub-Adviser will 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 Incentive Carried Interest will not be
based on gains from Private Funds.
INVESTMENT STRATEGIES
The Investment Adviser or Investment Sub-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 and
Investment Sub-Adviser in determining whether to make an investment
include:
o the presence or availability of strong management;
o 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;
o evidence that a potential Portfolio Company offers a
differentiated product or service and defensible market position;
o the opportunity for liquidity to eventually be obtained for the
proposed investment through an initial public offering or through
a sale of the business; and
o the willingness of a potential Portfolio Company to permit the
Portfolio and its 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 the Portfolio to influence the
strategic direction of the company.
Each of these criteria need not be present in every investment.
Although the Portfolio is a non-diversified company as defined in the
Investment Company Act, it does not expect to invest more than 10% of its
total assets in any one Portfolio Company or Private Fund. While the
Portfolio retains the flexibility to invest in all types of industries, it
currently expects 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. With the approval of
the Portfolio's board of managers, the Portfolio may change this policy.
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
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 the 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
In the context of the above, the Portfolio expects to emphasize the
technological innovations that are driving the transformation of the
economy, with specific focus on:
o Information Technology;
o Communications;
o Life Sciences; and
o Information Services.
INVESTMENT PRACTICES
Borrowing. The Fund does not intend to borrow funds to make
investments in the Portfolio. The Portfolio 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
Portfolio borrows funds (other than through a private loan), distributions
to Portfolio Unitholders, including the Fund, or the repurchase of the
Portfolio Units generally is prohibited under the Investment Company Act
unless the ratio of 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.
This would affect the Portfolio's ability to make distributions to its
shareholders. In general, the Portfolio 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 Portfolio's net asset value.
Also, as a condition to lending, lenders may place restrictions on the
Portfolio, which may include reserve requirements or operating
restrictions, and may limit the Portfolio's ability to make distributions.
There can be no assurance that the Portfolio will borrow when considered
desirable. The Portfolio may not be able to arrange debt financing on terms
acceptable to the Investment Adviser, the Investment Sub-Adviser and the
Portfolio's board of managers, or the Investment Adviser, the Investment
Sub-Adviser and the Portfolio's board of managers may believe borrowings
are not in the Portfolio's best interest. If the Portfolio were unable to
obtain debt financing, the Portfolio 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 Portfolio's
investment portfolio and the Units of the Fund could be adversely affected.
See "Risk Factors -- Borrowing."
Other Investment Policies. The Portfolio will not sell securities
short or on margin. Except for hedging purposes, the Portfolio will not
write puts or calls or purchase or sell commodities or commodity contracts.
The Portfolio will not underwrite the issuance of securities of other
companies except to the extent the Portfolio is deemed to be an underwriter
of any company that it invests in. Hedging instruments used to hedge Direct
Investments will be treated as Direct Investments for purposes of the
Portfolio's allocation and distribution policies.
The Portfolio 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 Portfolio 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,
short-term U.S. Government securities, bank letters of credit or such other
collateral as may be permitted under the Portfolio's investment objective
and policies and by regulatory agencies and approved by the board of
managers of the Portfolio. While a loan of portfolio securities is
outstanding, the Portfolio will continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower.
The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional
collateral or in recovery of the securities or possible loss of rights in
the collateral should the borrower fail financially.
The Portfolio 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 Portfolio may invest in
other entities whose business involves the holding or acquisition of real
estate or the holding or making of such leases.
The Portfolio'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 Portfolio's board of managers without
member approval.
The Fund has adopted certain fundamental investment restrictions set
forth in the statement of additional information which may not be changed
unless authorized by a Unitholder vote. Except for such restrictions, the
investment objective and policies of the Fund may be changed by the Board
of Managers without obtaining the approval of Unitholders.
RISK FACTORS
The Units 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 Fund and the Portfolio and this offering
before making an investment decision. Prospective investors should consider
the information set forth under "Management."
RISKS RELATED TO THE FUND AND THE PORTFOLIO
LACK OF OPERATING HISTORY
While the key personnel of the Investment Adviser and Investment
Sub-Adviser have considerable experience in venture capital and private
equity investing, including experience with Fund I and Fund II, the Fund
and the Portfolio have recently been formed and have no operating history
of their own upon which an investor may base an evaluation of the likely
performance of the Fund or the Portfolio. See "The Fund" and "Management."
MINIMUM PROCEEDS; PORTFOLIO DIVERSIFICATION
The Portfolio will begin operations upon the receipt of proceeds from
its initial closing after the receipt of subscriptions for capital
commitments of $[ ]. To the extent that the Portfolio makes fewer
investments, it may be subject to greater risks from developments adversely
affecting one or a limited number of issuers. If the Portfolio receives
only the minimum amount of subscriptions, it will have fewer assets to
invest and will likely acquire fewer investments than it would if it
received more Subscriptions. This would increase the Fund's and the
Portfolio's volatility and risk. See "The Offering."
RELIANCE ON THE INVESTMENT ADVISER AND INVESTMENT SUB-ADVISER
The investment decisions of the Portfolio will be made by the
Investment Adviser and the Investment Sub-Adviser. Investors will have no
right or power to take part in the management of the Fund or the Portfolio
and will not receive the detailed financial information made available by
issuers to the Investment Adviser and the Investment Sub-Adviser in
connection with the review of possible purchases for the Portfolio.
Accordingly, investors must be willing to entrust all management aspects of
the Fund and the Portfolio to the Investment Adviser and the Investment
Sub-Adviser. The investment personnel of the Investment Adviser and the
Investment Sub-Adviser consist of the same persons who are responsible for
the management of Fund I and Fund II. See "Management."
REGULATION
The Portfolio 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 Portfolio, 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 Portfolio's board of managers be
individuals who are not "interested persons" within the meaning of the
Investment Company Act and that the Portfolio 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 Investment Sub-Adviser believe that
the constraints applicable to BDCs are consistent with the objectives of
the Portfolio. However, such constraints could prohibit the Portfolio from
investing in some potentially attractive situations that might otherwise be
available. At the same time, the Portfolio's election to be treated as a
business development company exempts it from certain provisions of the
Investment Company Act. As a result, the Portfolio operates differently
than a registered investment company and is subject to different and
potentially greater risks as compared to a registered investment company.
See "Regulation."
There are relatively few judicial decisions under and administrative
interpretations of the portions of the Investment Company Act applicable to
the Portfolio, and there can be no assurance that such provisions will be
interpreted or administratively implemented in a manner consistent with the
Fund's and the Portfolio's objectives and intended manner of operation. In
the event that the Portfolio's board of managers determines that it cannot
operate effectively as a BDC, the Portfolio's board of managers may at some
future date decide to withdraw the Portfolio's election to be treated as a
BDC and transform it into a registered investment company or an operating
company not subject to regulation under the Investment Company Act, or
cause the Portfolio to be liquidated. The Portfolio could not operate as an
operating company unregulated under the Investment Company Act consistent
with its current investment policies. Should the Portfolio's board of
managers seek to withdraw the Portfolio's election as a BDC, it must obtain
the approval of members who represent a majority of the outstanding
Portfolio Units. See "Description of Units."
FUND/PORTFOLIO INVESTMENT STRUCTURE.
Investors should be aware that the Fund, unlike other investment
companies that directly acquire and manage their own portfolios of
securities, seeks to achieve its investment objective by investing its
assets in the Portfolio, a separate, closed-ended management investment
company with a substantially similar investment objective (the Fund may
also temporarily make investments in short-term U.S. Government
Securities). Therefore, the Fund's interest in the securities owned by the
Portfolio is indirect. In addition to selling an interest to the Fund, the
Portfolio may sell interests to other affiliated and non-affiliated
investors. Investors in the Fund should be aware that differences may
result in the returns experienced by other investors in the Portfolio.
Investors who are willing to meet the investment minimum of the Portfolio
and who desire the receipt of distributions of securities in kind rather
than in cash should consider an investment directly in the Portfolio.
The Board of Managers of the Fund has considered the advantages and
disadvantages of investing the assets of the Fund in the Portfolio, as well
as the advantages and disadvantages of the two-tier format. The Managers
believe that the structure offers opportunities for lower overall expenses
than would be the case were the Fund to invest directly in portfolio
companies.
POTENTIAL CONFLICTS OF INTEREST
The Investment Adviser, the Investment Sub-Adviser and their
affiliates may be subject to various conflicts of interest in connection
with their relationships and transactions with the Portfolio. Such
conflicts of interest include the following.
INCENTIVE CARRIED INTEREST. The Investment Adviser 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 Direct Investments made by the Portfolio as set forth
under "Capital Accounts, Allocations and Distributions." This may cause the
Investment Adviser to select investments for the Portfolio that involve
greater risk than it would select if it did not receive a portion of such
capital gains.
CONFLICTS AS TO INVESTMENT OPPORTUNITIES. The Investment Adviser and
its affiliates may make investments for their own accounts and may be in
competition with the Portfolio for such investments. In addition, the
Investment Adviser, the Investment Sub-Adviser and their affiliates serve
as investment advisers for their fiduciary accounts and other private or
public investment vehicles that have investment objectives identical or
similar to those of the Portfolio. While the Investment Adviser and
Investment Sub-Adviser are obligated to endeavor to provide the Portfolio
with continuing and suitable investment opportunities consistent with its
investment objective and policies, the Investment Adviser and Investment
Sub-Adviser are not required to present to the Portfolio any particular
opportunity that falls within the investment objective and policies of the
Portfolio. The Investment Adviser and Investment Sub-Adviser will endeavor
to offer to the Portfolio on an equitable basis investment opportunities
that would be suitable for both the Portfolio and other accounts for which
the Investment Adviser and Investment Sub-Adviser provide discretionary
investment advisory services. The Investment Adviser and Investment
Sub-Adviser will endeavor to resolve conflicts with respect to investment
opportunities in a manner deemed equitable to all and consistent with their
fiduciary duties.
ALLOCATION OF MANAGEMENT TIME AND SERVICES. The Portfolio will not
have independent officers or employees and will rely upon the Investment
Adviser, the Investment Sub-Adviser and their affiliates for management of
the Portfolio and its assets. The Investment Adviser and Investment
Sub-Adviser believe that they and their affiliates have or can attract
sufficient personnel to discharge all of their responsibilities to the
Portfolio. Conflicts of interest may arise in allocating management time,
services or functions between the Portfolio and other entities for which
the Investment Adviser, the Investment Sub-Adviser and their affiliates may
provide similar services. The officers and employees of the Investment
Adviser and Investment Sub-Adviser will devote such time to the affairs of
the Portfolio as they, in their sole discretion, determine to be necessary
for the conduct of the business of the Portfolio.
RELATIONSHIPS WITH PORTFOLIO COMPANIES. The Investment Adviser,
Investment Sub-Adviser and their affiliates may serve as directors or
officers of or consultants to certain Portfolio Companies and, in
connection therewith, earn various fees which may be paid in the form of
cash, securities or other consideration. Any such consideration earned from
a Portfolio Company by the Investment Adviser, the Investment Sub-Adviser
or any of their officers or directors will be paid-over to the Portfolio.
In addition, the Investment Adviser, Investment Sub-Adviser and their
affiliates, will from time to time provide investment advisory, trust,
banking or insurance services to certain Portfolio Companies in connection
with their ordinary business operations. The Investment Adviser and
Investment Sub-Adviser expect that the terms of such relationships will be
consistent with the terms on which the Investment Adviser, Investment
Sub-Adviser or their affiliates generally provide such services to their
customers.
AFFILIATED TRANSACTIONS. The Investment Company Act restricts
transactions between the Portfolio and Portfolio Companies controlled by
the Portfolio and any "affiliated person" of the Portfolio (as defined in
the Investment Company Act) including, among others, the Portfolio's
officers, members of the Portfolio's board of managers, principal Portfolio
Unitholders, employees, the Investment Adviser, the Investment Sub-Adviser,
certain of their affiliated persons and other affiliates of the Portfolio.
In many cases, the Investment Company Act prohibits transactions unless the
Portfolio 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 federal
and state banking regulations impose restrictions on certain types of
transactions between a bank and its affiliates. The Portfolio does not
believe that an order from the Commission would ordinarily be required for
the transactions discussed above under "Relationships with Portfolio
Companies." Certain other transactions may require an order from the
Commission. The Portfolio may in the future engage in such activities, but
does not have a present plan to do so. The Portfolio does not intend to
engage in such transactions unless it has obtained an order from the
Commission or determined that an order is not required.
Among such other activities are joint investments in Portfolio
Companies. The Investment Adviser, the Investment Sub-Adviser and their
affiliates and employees may in the future participate with the Portfolio
in joint investments in Portfolio Companies and other securities and may
make loans to, or other investments in, Portfolio Companies. Any investment
in the same security at or about the same time will be required to be on a
basis which, in the judgment of the Portfolio's board of managers, is not
more advantageous to such other persons than the basis upon which the
Portfolio participates in such joint investments, will require the prior
approval of the Portfolio's board of managers, including a majority of the
disinterested members of the Portfolio's board of managers, and may require
an order of the Commission. Because of their potentially varying investment
objectives or other factors, conflicts could arise between the Portfolio
and its affiliates relating to co-investments, which can only be resolved
through the exercise by the Investment Adviser and Investment Sub-Adviser
of such judgment as is consistent with their fiduciary duties to the
Portfolio. Even with the proper exercise of such judgment, however, there
can be no assurance that potential conflicts would be resolved in a manner
favorable to the Portfolio.
UNSPECIFIED USE OF PROCEEDS
Inasmuch as the Portfolio 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 and Investment Sub-Adviser to
identify and make portfolio investments consistent with the Portfolio'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 and Investment Sub-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. At the first subscription closing, the Fund will receive
an opinion of its counsel to the effect that, under current law and based
on certain assumptions and representations, the Fund 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. The Portfolio will receive a
similar opinion. No ruling has been or will be sought from the IRS
regarding the status of either the Fund or the Portfolio as a partnership.
An opinion of counsel is not binding on the IRS or any court.
A limited liability company (such as the Fund or the Portfolio) would
be treated as a corporation for federal income tax purposes if it were to
become a publicly traded partnership. If the Fund or the Portfolio (or
both) were treated as a publicly traded partnership or otherwise treated as
a corporation for federal income tax purposes, material adverse
consequences for the members would result. The entity would be subject to
tax on its income at corporate tax rates, without a deduction for any
distribution to the members of such entity, thereby materially reducing the
amount of any cash available for distribution to the members. In addition,
the members of the entity would be treated as shareholders for federal
income tax purposes. Thus, capital gains and losses and other income and
deductions of the entity would not be passed through to the members, and
all distributions by the entity to its members would be treated as
dividends, return of capital and/or gains. See "Certain Federal Income Tax
Considerations - Tax Status of the Fund and the Portfolio."
TAXATION OF MEMBERS ON PROFITS AND LOSSES. The Fund and the
Portfolio, if treated as partnerships for tax purposes as discussed above,
will not themselves be subject to federal income tax. Rather, with respect
to the Fund, each member in computing his, her or its federal income tax
liability will be required to take into account his, her or its allocable
share of Fund items of income, gain, loss, deduction and expense for the
taxable year of the Fund ending within or with such taxable year of the
member, regardless of whether the member has received any distributions
from the Fund. Prospective investors should also be aware that they will be
subject to various limitations on their ability to deduct their allocable
share of Fund and Portfolio losses (or items of loss and deduction
thereof). For these and various other reasons, it is possible that a
member's federal income tax liability with respect to his, her or its
allocable share of Fund 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. See "Certain Federal Income Tax
Considerations - Taxation of Members of the Fund."
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 advisers
with specific reference to their own tax situations prior to investing in
the Fund. No assurance can be given that the current federal income tax
treatment applicable to an investment in the Fund 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 advisers 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 Fund. 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 Fund, see "Certain
Federal Income Tax Considerations."
LIABILITY OF MEMBERS
You will not be liable for any obligations of the Fund in excess of
your capital account balance, plus your share of undistributed profits.
However, if you receive a distribution from the Fund, and, after such
distribution, the liabilities of the Fund exceed the fair value of the
Fund'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 Fund.
The Fund has no intention of making such distributions. You will not have
the right to a return of the subscription amount 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 Fund, which we may withhold for any reason in our 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 Fund (which we may withhold
in our 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 Fund of any proposed transfer must include
evidence satisfactory to the Fund 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 a 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 Fund under the policies
established by the Fund, the Fund shall promptly take all necessary actions
so that each transferee or successor to whom those Units is transferred is
admitted to the Fund as a member. Each member and transferee must pay all
expenses, including attorneys' and accountants' fees, incurred by the Fund
in connection with such transfer. See "Description of Units - Summary of
Limited Liability Company Operating Agreement."
By subscribing for Units, each member will agree to indemnify and
hold harmless the Fund, the Portfolio, the Fund's Adviser, the Distributor
and any of their affiliates and controlling persons and each other member
and any successor or assign of any 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 these provisions or any misrepresentation made by
that member in connection with any such transfer. A similar indemnification
is required to be made by a permitted transferee.
DISTRIBUTIONS IN KIND. The Portfolio may make distributions of
securities or other property in kind. To the extent that the Fund receives
distributions in kind from the Portfolio, the Fund intends ordinarily to
retain such assets until the Fund's Adviser determines that it is
advantageous to dispose of such assets. The Fund may, however, also make
distributions in kind. To the extent that the Fund 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 Fund
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.
GENERAL RISKS OF INVESTMENTS
RISK OF PRIVATE EQUITY INVESTMENTS
While the Portfolio 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 Portfolio's investments
in Private Funds serve to further diversify its holdings. Since the
Portfolio'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 Portfolio. 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
investments 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 Portfolio
will have no control. The Portfolio 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 Portfolio 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 Portfolio's term.
The Portfolio's private equity investments will consist primarily of
securities that are subject to restrictions on sale by the Portfolio
because they were acquired from the issuer in "private placement"
transactions or because the Portfolio is deemed to be an affiliate of the
issuer. Generally, the Portfolio 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
Portfolio 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
Portfolio's ability to sell, distribute or liquidate its investments in
Portfolio Companies because the issuers are privately held, because the
Portfolio 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 Portfolio'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
Portfolio's 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 Portfolio will reflect these
restrictive factors in the valuation of its investments, no assurance can
be given that the estimated values will represent the return that might
ultimately be realized by the Portfolio from the investment. See "Valuation
of Portfolio Securities." The Fund's investment in the Portfolio will also
be illiquid in that there are substantial restrictions as to transfer of
Portfolio Units.
NEED FOR FOLLOW-ON INVESTMENTS
Following its initial investments in Portfolio Companies, the
Portfolio 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 Portfolio may borrow to
make follow-on investments, there is no assurance that the Portfolio will
make follow-on investments or that the Portfolio will have sufficient funds
to make such investments. Any decision by the Portfolio 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 Portfolio to increase its participation in
a successful operation.
COMPETITION FOR INVESTMENTS
The Portfolio 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
Portfolio will frequently be a co-investor with other professional venture
capital, private equity or leveraged buyout groups including several in
which the Portfolio may be an investor. These relationships with other
groups should expand the Portfolio'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.
INVESTMENT IN COMPANIES DEPENDENT UPON NEW TECHNOLOGIES
Under current market conditions, the Portfolio plans to focus on
investments in companies that rely significantly on technological events or
advances in their product development, production or operations. The value
of the Portfolio Units may be susceptible to factors affecting technology
and technology-related industries and to greater risk and market
fluctuation than an investment in a fund that invests in a broader range of
portfolio securities. The specific risks faced by technology companies
include:
o rapidly changing technologies and products that may quickly
become obsolete;
o changing investor sentiments and preferences with regard to
technology sector investments (which are generally perceived as
risky);
o cyclical patterns in information technology spending which may
result in inventory write-offs;
o scarcity of management, engineering and marketing personnel with
appropriate technological training;
o the possibility of lawsuits related to technological patents and
intellectual property; and
o exposure to a high degree of government regulation, making these
companies susceptible to changes in government policy and
failures to secure regulatory approvals.
BORROWING
The Fund does not intend to borrow to invest in the Portfolio, and
the Portfolio does not intend to borrow funds for investment purposes.
However, the Portfolio may borrow funds to facilitate the making of
follow-on investments, to maintain various regulatory qualifications or to
pay contingencies and expenses. The Portfolio will not borrow to pay the
advisory fee payable to the Investment Adviser. The Portfolio 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 Portfolio's 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 Portfolio may borrow funds in an amount up to 25% of the value of its
total assets (after giving effect to the proceeds from the borrowing). See
"Investment Objective and Policies -- Borrowing" and "Regulation."
Although the Portfolio 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 Portfolio's net
asset value. The Portfolio also expects that, as a condition to lending,
lenders may place restrictions on the Portfolio, which may include reserve
requirements or operating restrictions, and may limit the ability of the
Portfolio to make distributions to members. There can be no assurance that
debt financing will be available on terms that the Investment Adviser,
Investment Sub-Adviser or the Portfolio's board of managers consider to be
acceptable and in the best interests of the Portfolio. If borrowing is
unavailable, the Portfolio may be required to make an untimely disposition
of an investment.
LACK OF DIVERSIFICATION
The Fund and the Portfolio intend to operate as non-diversified
investment companies within the meaning of the Investment Company Act and,
therefore, the Fund and the Portfolio's investments may not be
substantially diversified. In any event, the Fund and the Portfolio will
not be able to achieve the same level of diversification as much larger
entities engaged in similar activities. The Fund's and the Portfolio's
assets may be subject to greater risk of loss than if they were more widely
diversified, inasmuch as the failure of one or more of a limited number of
investments could have a greater adverse effect on the Portfolio than the
failure of one of a large number of investments. The net asset value of a
non-diversified company may be more volatile than in the case of a
diversified company. See "Investment Objective and Policies."
THE OFFERING
The Fund is offering investors the opportunity to subscribe to make
capital contributions to the Fund in exchange for membership interests in
the Fund (the "Units"). The Fund is offering up to 100,000 Units through
Charles Schwab & Co., Inc., as principal distributor. The Distributor is
under common control with an affiliate of the Investment Adviser and
Investment Sub-Adviser. Units may be sold by the Distributor to investors
through financial intermediaries acting as broker or agent for their
customers. The Fund's Adviser or an affiliate will pay the Distributor from
its own assets, and not the assets of the Fund, an amount equal to 0.02% of
the total of all subscriptions received in this offering. The Fund's
Adviser or an affiliate, out of its own assets and not the assets of the
Fund, may compensate Selling Agents who sell Units of the Fund to
investors. The Fund's Adviser or an affiliate will also pay the
Distributor, to the extent that investors are introduced to the Fund
through the Distributor, an ongoing fee for the sale of Units and the
provision of ongoing investor services in an amount equal to the annual
rate through the fifth anniversary of the final subscription closing date
of 0.45% of the average quarterly net asset value of all outstanding Units
held by investors introduced to the Fund by the Distributor and at the
annual rate of 0.22% thereafter, subject to elimination upon all such fees
totaling 6.5% of the gross proceeds received by the Fund from this
offering. Such ongoing investor services may include: answering questions
from the Distributor's clients or their advisers concerning the Fund and
its operations; providing information to the Distributor's clients or their
advisers at the request of the Fund or the Fund's Adviser; consulting upon
request with the Fund, the Board of Managers or the Fund's Adviser
concerning investor relations; and providing such other investor relations
services as the Fund's Adviser may reasonably request. The offering will
terminate December 31, 2000, subject to extension by the Board of Managers
to a date not later than May 11, 2001. If subscriptions for at least [ ]
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; Portfolio Diversification." The minimum subscription is
$25,000. We have the right to waive the minimum at our discretion.
Each investor will be required to complete, execute and deliver to
the Fund an executed copy of the Subscription Agreement, which will form a
binding contract of the investor. The Fund will not commence accepting
subscriptions until the Portfolio has set a date for its first closing. The
Fund intends to notify you of the date upon which it will begin accepting
subscriptions. Any subscriptions received before such date will be returned
promptly. Pursuant to the Subscription Agreement your subscription amount
is required to be paid on or before the final subscription closing date
(not later than December 31, 2000, subject to extension). Units may be
purchased only by persons who represent to the Fund that the value of their
total assets (exclusive of their principal residence) less their total
liabilities is at least $500,000 and that the amount that they are
subscribing for does not exceed 10% of their total assets less their total
liabilities, and who make the other representations included in the
Subscription Agreement to be entered into by each investor.
Payments transmitted by subscribers to the Fund, or to the Selling
Agents, for investment in the Fund prior to the applicable closing date
will be deposited in an interest-bearing bank escrow account with PFPC,
Inc. pending each closing. Any checks should be made payable to PFPC Inc.,
as "Escrow Agent," and must be transmitted by Selling Agents directly to
the Escrow Agent by noon of the next business day after receipt. In the
event the Fund rejects a subscriber's Subscription Agreement or a
subscriber elects to withdraw his subscription prior to his or her
subscription closing date, PFPC, Inc. 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 totaling at least $[
]. The Fund 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. Within five business days after each closing, PFPC,
Inc. will mail to each subscriber checks in the respective amounts of
interest earned by funds held in escrow. If the minimum of [ ]
subscriptions are received, any charges or expenses associated with the
escrow account will be paid by the Fund's Adviser or an affiliate.
USE OF PROCEEDS
The net proceeds to the Fund from this offering will be $50,000,000
if all Units are sold and before deducting organizational and initial
offering expenses estimated to be approximately [$ ]. Organizational and
offering expenses will be payable from the offering proceeds and will be
deducted from members' capital accounts. [ , has agreed to pay the Fund's
organizational costs, estimated to be in the event that the Fund receives
subscriptions totaling less than $ . If the Fund receives subscriptions
totaling [ ] or more, the Fund will pay its own organizational expenses.]
The Fund expects to invest substantially all of the proceeds from
this offering in Excelsior Venture Partners III, LLC (the "Portfolio")
within 30 days of the Termination Date (expected to be December 31, 2000,
subject to extension). The Fund and the Portfolio share substantially the
same investment objective and policies. Pending investment and for
short-term cash management purposes, the Fund may invest in short-term U.S.
Government securities.
It is anticipated that there will be a significant period of time (up
to four years) before the Portfolio becomes fully invested. Although the
Portfolio intends to invest or commit to invest more than 50% of the
proceeds from the offering in Venture Capital Investments within the
earlier of (i) two years after the final subscription closing date and (ii)
two and one-half years after the commencement of this offering, 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 Portfolio. See "Risk Factors - Illiquidity of
Private Equity Investments."
MANAGEMENT
INVESTMENT ADVISERS; COMPENSATION
Investment Advisers. U.S. Trust Company, a Connecticut state
chartered bank and trust company, will serve as the investment adviser of
the Fund (the "Fund's Adviser"). U.S. Trust Company will also serve as the
Investment Adviser of the Portfolio pursuant to an investment advisory
agreement with the Portfolio. United States Trust Company of New York, a
New York state chartered bank and trust company, will serve as the
Investment Sub-Adviser of the Portfolio pursuant to an investment
sub-advisory agreement with the Investment Adviser and the Portfolio. U.S.
Trust Company and United States Trust Company of New York are wholly owned
subsidiaries of U.S. Trust Corporation, a registered bank holding company.
The Investment Adviser or Investment Sub-Adviser have been the investment
advisers to Fund I and Fund II, each a registered BDC, since September 1994
and March 1997, respectively. The investment management personnel of the
Investment Adviser and Investment Sub-Adviser consist of the same persons
that perform the investment management functions for Fund I and Fund II.
U.S. Trust Company's principal business address is 225 High Ridge Road,
Stamford, Connecticut 06905. United States Trust Company of New York's
principal business address is 114 West 47th Street, New York, New York
10036. On December 31, 1999, U.S. Trust's Asset Management Group, which
includes U.S. Trust Company and United States Trust Company of New York and
other affiliates of U.S. Trust Corporation, had approximately $86 billion
in assets under management.
Under the supervision of the Board of Managers, the Fund's Adviser is
responsible for managing the Fund's temporary investments in U.S.
Government securities and for managing the disposition of assets
distributed to the Fund in kind from the Portfolio. The Fund's Adviser is
also responsible for providing or arranging for management and
administrative services for the Fund.
Under the supervision of the Portfolio's board of managers, the
Investment Adviser and Investment Sub-Adviser are responsible for finding,
evaluating, structuring and monitoring the Portfolio's investments and for
providing or arranging for management and administrative services for the
Portfolio. The investment professionals in charge of the day-to-day
management of the Portfolio have extensive experience in venture capital
and private equity investing. See "Board of Managers, Officers and
Investment Professionals" below.
U.S. Trust Corporation is an indirect, wholly owned subsidiary of The
Charles Schwab Corporation ("Schwab"). Through its principal subsidiary,
Charles Schwab & Co., Inc., Schwab is the nation's fourth largest financial
services firm and the nation's largest electronic brokerage firm, in each
case, as measured by customer assets. At December 31, 1999, Schwab served
6.6 million active accounts with $725 billion in customer assets through
340 branch offices, four regional customer telephone service centers and
automated telephone online channels. Approximately 30% of Schwab's customer
assets and approximately 13% of its customer accounts are managed by 5,800
independent, fee-based investment advisers served by Schwab's institutional
investor segment. Charles R. Schwab is the founder, Chairman, Co-Chief
Executive Officer, a director and significant shareholder of Schwab.
Management Fees. The Fund will pay the Fund's Adviser an investment
advisory fee equal to 0.1% of the Fund's net assets that are not
represented by the Fund's investment in the Portfolio. The Fund will not
pay the Fund's Adviser a management fee on assets invested in the
Portfolio. The Portfolio will pay the Investment Adviser, on a quarterly
basis, a management fee at an annual rate equal to 2.00% of the Portfolio's
average quarterly net assets through the fifth anniversary of the
Portfolio's first closing date and at an annual rate of 1.00% of net assets
thereafter. The management fee is payable in arrears on the last day of
each fiscal quarter. The Investment Adviser has agreed to waive the
management fee during the subscription period, which will end on the final
subscription closing date. Pursuant to the Investment Sub-Advisory
Agreement, the Investment Adviser pays an investment management fee to the
Investment Sub-Adviser.
Investment Advisory Agreement. The Fund will enter into an
investment advisory agreement with the Fund's Adviser. The Fund's
Investment Advisory Agreement provides that the Fund's Adviser shall,
subject to the supervision of the Fund's Board of Managers, identify,
monitor and dispose of the Fund's investments and provide management and
administrative services. Such administrative services may include:
providing the Fund with office space, equipment, facilities, supplies and
clerical services; keeping and maintaining the books and records of the
Fund, 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 Fund. The Fund also uses the services of
an administrator, PFPC Inc.
Under the Fund's Investment Advisory Agreement, the Fund is obligated
to bear all costs and expenses directly allocable and identifiable to the
Fund or its business' or investments, including, but not limited to, fees
and expenses of the Board of Managers; fees and expenses of the Fund's
Adviser; fees and expenses of registering the Fund's Units under federal
and state securities laws; interest; taxes; fees and expenses of the Fund's
legal counsel and independent accountants; fees and expenses of the Fund's
administrator (PFPC Inc.), transfer agent and custodian; expenses of
printing and mailing Unit 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 Fund (or its assets) or its actual investments; expenses
of membership in investment company and other trade associations; expenses
of fidelity bonding and other insurance premiums; expenses of members'
meetings; fees payable to the National Association of Securities Dealers,
Inc. (the "NASD"), if any, in connection with this offering;
indemnification costs and expenses; fees and expenses of legal counsel to
the members of the Board of Managers who are not interested persons of the
Fund (within the meaning of the Investment Company Act); and the Fund's
other business and operating expenses.
The Fund's Investment Advisory Agreement provides for indemnification
by the Fund of the Fund's Adviser, its affiliates and their officers,
directors, employees, members and agents from any and all losses, claims,
damages, liabilities or expenses (including reasonable counsel fees and
expenses) incurred by them in connection with, or resulting from, their
actions or inactions in connection with the performance of, or under, the
Fund's Investment Advisory Agreement. Indemnification is only available to
the extent the loss, claim, damage, liability or expense did not result
from willful misfeasance, bad faith or gross negligence in the performance
by the persons seeking indemnification of their duties under the Fund's
Investment Advisory Agreement, or the reckless disregard of their
obligations and duties under the Fund's Investment Advisory Agreement.
The Fund's Investment Advisory Agreement provides that it will
continue in effect for two years and that, after the initial period of
effectiveness 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 Fund who are not
parties to the 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
Fund; or (ii) the vote of a majority of the full Board of Managers of the
Fund. The Fund's Investment Advisory Agreement also provides that it be
terminated at any time, without the payment of any penalty, either by: (i)
the Fund, by action of the Board of Managers or by vote of a majority of
the outstanding Units of the Fund, on 60 days' written notice to the Fund's
Adviser; or (ii) the Fund's Adviser on 90 days' written notice to the Fund.
The Fund's Investment Advisory Agreement will terminate immediately in the
event of its "assignment" (as defined in the Investment Company Act).
The Portfolio has entered into substantially similar investment
advisory agreements with the Investment Adviser and the Investment
Sub-Adviser.
INVESTMENT OPERATIONS
The Investment Adviser and/or the Investment Sub-Adviser will
initiate, screen and monitor the Portfolio's investments.
Direct Investments will typically be structured in negotiated,
private transactions directly with the issuer. The Portfolio'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 Portfolio investments, the Portfolio will work with
the Portfolio Company to develop and implement the Portfolio Company's
long-term financial strategy and to enhance its value.
The Investment Committee of the Investment Sub-Adviser, which
consists of senior investment professionals of the Investment Sub-Adviser,
will make the final investment decisions regarding any investment proposal
made by the Investment Adviser or Investment Sub-Adviser.
Deal Origination. Investment proposals may come to the attention of
the Investment Adviser or Investment Sub-Adviser from many sources
including unsolicited proposals from the public, personal contacts of the
Investment Adviser, Investment Sub-Adviser or their 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 and the Investment
Sub-Adviser believe that investment opportunities may also come from
several venture capital and private equity funds of which they or any of
their affiliates may be an investor. Under certain circumstances, such
opportunities may require prior exemptive relief from the Commission. See
"Risk Factors --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 and/or the Investment Sub-Adviser
to assess the prospects and risks of the potential investment. The
experience and expertise of the officers of the Investment Adviser and the
Investment Sub-Adviser will be essential in evaluating products, markets,
industry trends, financial requirements, competition and the management
team associated with a prospective investment. Each investment will be
approved by the Investment Committee of the Investment Sub-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 or the
Investment Sub-Adviser will be responsible for conducting such negotiations
on behalf of the Portfolio 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 Portfolio'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 financial decisions. Representatives of the
Portfolio, the Investment Adviser or the Investment Sub-Adviser and their
affiliates will frequently serve as members of the boards 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 Portfolio 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 Portfolio 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
or the Investment Sub-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 Portfolio's investments and
will usually seek to obtain registration rights at the expense of the
issuer and reporting compliance for eligible companies under Rule 144 under
the Securities Act. Timing of divestiture or liquidation depends on the
performance of the Portfolio Company, the ability of the Portfolio Company
to refinance its outstanding securities and other financial market
opportunities. See "Risk Factors -- Illiquidity of Private Equity
Investments." The Portfolio will bear the costs of liquidating investments
to the extent that such expenses are not paid by the issuer. The Portfolio
may as an alternative to liquidating certain investments distribute such
investments in kind. Prior to liquidation of the Portfolio, the Portfolio
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. The Fund ordinarily intends to liquidate such assets
directly, rather than distributing such assets in kind to investors.
Distributions in kind involve certain expenses and risks. See "Risk Factors
-- Distributions In Kind."
ADMINISTRATOR
The Administrator, PFPC Inc., performs certain administration,
accounting and investor services for the Fund and the Portfolio. In
consideration for these services, the Fund (i) pays the Administrator a
variable fee between 0.065% and 0.03% based on average quarterly net
assets, subject to a minimum quarterly fee of approximately $30,000, (ii)
pays annual fees of approximately $11,000 for taxation services and (iii)
will reimburse the Administrator for out-of-pocket expenses. The Portfolio
pays the Administrator a variable fee between 0.105% and 0.07% based on
average quarterly net assets, subject to a minimum quarterly fee of
approximately $30,000, (ii) pays annual fees of approximately $11,000 for
taxation services and (iii) will reimburse the Administrator for
out-of-pocket expenses.
BACKGROUND
The following list includes all the private companies and private
funds in which Fund I and Fund II have invested as of July 31, 2000. Except
as otherwise noted, unrealized gain/(loss) and total value reflect the
values assigned for purposes of determining the net asset values of Fund I
and Fund II. The values of securities for which no active trading market
exists or which are subject to material restrictions on resale reflect fair
value as determined pursuant to such fund's valuation policies except as
otherwise noted. All or substantially all of the investments listed below
are valued at fair value. The list is intended to illustrate the types of
investments with which the Investment Adviser and Investment Sub-Adviser
have experience.
SUMMARY OF DIRECT INVESTMENTS
MADE BY U.S. TRUST
INFORMATION AS OF JULY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL VALUE
AVERAGE (COST BASIS AND REALIZED
HOLDING COST REALIZED UNREALIZED GAIN/(LOSS) AND
DIRECT INVESTMENTS PERIOD (YEARS) BASIS GAIN/(LOSS) GAIN/(LOSS) UNREALIZED GAIN/(LOSS))
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENTS REALIZED AND/OR
PUBLIC COMPANIES
Accrue Software, Inc. (NeoVista)* 2.4 $ 1,038,488 $ 680,572 $563,937 $ 2,282,997
CommSite International, Inc. 2.6 2,718,750 106,058 - 2,824,808
Corsair Communications, Inc. 2.7 3,000,003 1,743,843 - 4,743,846
LifeMinders, Inc. ** 1.1 11,499,997 24,050,821 69,758,741 105,309,559
QuickLogic Corporation 3.7 3,000,000 5,389,597 1,115,941 9,505,538
Rental Services Corp. 1.7 985,000 2,086,479 - 3,071,479
Signius Corporation 3.1 3,418,146 (3,414,128) - 4,018
Softcom Microsystems, Inc. 1.0 4,178,649 9,998,176 1,243,640 15,420,465
WNP Communications, Inc. 0.9 5,877,855 13,338,276 - 19,216,131
----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL $35,716,888 $ 53,979,694 $ 72,682,258 $ 162,378,840
PRIVATE COMPANIES
Advantage Schools, Inc. 1.5 $ 4,606,551 $ - $ 6,264,725 $ 10,871,276
Best Friends Pet Care, Inc. 3.3 3,525,000 - - 3,525,000
BPA Systems, Inc. 0.2 5,000,000 - - 5,000,000
Captura Software, Inc. 1.5 4,799,998 - 3,078,260 7,878,258
Classroom Connect, Inc. 1.6 7,999,951 - 1,819,965 9,819,915
Constellar Corporation 2.3 6,999,995 - - 6,999,995
Curon Medical, Inc. 0.8 7,624,144 - - 7,624,144
ePod Corporation 0.5 1,550,000 - 1,071,240 2,621,240
firstsource Corporation 0.4 10,000,000 - - 10,000,000
KillerBiz, Inc. 0.6 583,333 - - 583,333
LogicVision, Inc. 2.7 1,549,499 - 106,208 1,655,707
Managemark, Inc. 1.4 5,500,002 - - 5,500,002
MarketFirst Software, Inc. 0.8 5,849,543 - - 5,849,543
MySeasons.com, Inc. 0.4 2,000,100 - - 2,000,100
PowerSmart, Inc. 2.4 9,237,500 - 4,851,261 14,088,761
Protogene Laboratories, Inc. 0.6 5,680,000 - - 5,680,000
ReleaseNow.com Corp. 1.9 6,810,039 - 2,646,106 9,456,145
SurVivaLink Corporation 1.9 7,584,999 - - 7,584,999
Zeus Wireless, Inc. 0.6 5,000,001 - - 5,000,001
----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL $101,900,655 $ - $ 19,837,764 $ 121,738,419
INVESTMENTS WRITTEN OFF
AbTox, Inc. 3.2 $ 2,800,001 $ - $ (2,800,001) $ -
Cardiopulmonary Corporation 3.6 2,150,000 - (2,150,000) -
P2 Holdings Corp. 1.3 2,750,000 (2,750,000) - -
Party Stores Holdings, Inc. 1.4 2,055,206 (2,055,206) - -
----------------------------------------------------------------------------------------------------------------------------------
SUB-TOTAL $ 9,755,207 $ (4,805,206) $ (4,950,001) $ -
----------------------------------------------------------------------------------------------------------------------------------
TOTAL - ALL DIRECT INVESTMENTS 1.6 $147,372,749 $ 49,174,488 $ 87,570,022 $ 284,117,259
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Fund I owns both restricted and unrestricted stock. Fund I's holdings of
restricted stock are valued at a 20% discount to the public market
valuation shown in the table.
** Fund II's holdings are restricted as to resale and are valued at a 25%
discount to the public market valuation shown in the table.
SUMMARY OF FUND INVESTMENTS
MADE BY U.S. TRUST
INFORMATION AS OF JULY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL VALUE
(COST BASIS AND REALIZED
CAPITAL COST REALIZED UNREALIZED GAIN/(LOSS) AND
FUND INVESTMENTS COMMITTED BASIS GAIN/(LOSS) GAIN/(LOSS) UNREALIZED GAIN/(LOSS))
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advanced Technology Ventures V $ 3,000,000 $ 2,175,000 $ - $ 1,765,474 $ 3,940,474
Allegra Capital Partners III 2,000,000 2,000,000 1,302,878 1,254,388 4,557,266
Brand Equity Ventures I 2,500,000 2,250,000 636,454 597,946 3,484,399
Brentwood Associates Buyout Fund II 2,000,000 2,000,000 158,388 (27,576) 2,130,812
Brentwood Associates III 5,000,000 1,993,700 - (206,965) 1,786,735
Broadview Capital II 5,000,000 2,250,000 - (111,964) 2,138,036
Bruckmann, Rosser, Sherrill & Co. 2,000,000 2,000,000 152,242 234,351 2,386,593
Commonwealth Capital Ventures II 4,000,000 2,900,000 1,349,341 (205,831) 4,043,510
Communications Ventures III 5,000,000 5,000,000 - 15,239,374 20,239,374
Friedman, Fleischer & Lowe 5,000,000 941,218 - (216,926) 724,292
Mayfield Fund X 5,000,000 4,000,000 - 3,059,017 7,059,017
Mid-Atlantic Venture Fund III 5,000,000 4,000,000 - 4,015,159 8,015,159
Morgenthaler Venture Partners IV 2,000,000 2,000,000 1,773,594 3,240,866 7,014,460
Morgenthaler Venture Partners V 8,000,000 5,600,000 279,036 10,600,205 16,479,241
Quad-C Partners V 5,000,000 3,361,017 - 785,788 4,146,805
Sevin Rosen Fund V 2,000,000 2,000,000 1,654,983 819,055 4,474,038
Sevin Rosen Fund VI 2,500,000 2,175,000 1,849,706 642,347 4,667,053
Trinity Ventures VI 3,000,000 2,342,249 439,319 2,173,320 4,954,889
Vanguard Venture Partners V 2,000,000 2,000,000 2,378,469 2,746,747 7,125,216
----------------------------------------------------------------------------------------------------------------------------------
TOTAL - ALL FUND INVESTMENTS $70,000,000 $50,988,184 $11,974,411 $46,404,772 $109,367,368
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
TOTAL - ALL INVESTMENTS $198,360,934 $61,148,900 $133,974,794 $393,484,627
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENTS REALIZED AND/OR PUBLIC COMPANIES
Accrue Software, Inc., Cupertino, CA ("Accrue")
Initial Investment Date: June 1997
Total Investment: $1.0 million
Total Investment Value:* $2.2 million
In January 2000, Accrue (NASDAQ: ACRU) acquired NeoVista in exchange
for 2.4 million shares of Accrue stock. 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 and is applied to inventory management,
customer profiling, behavior prediction and fraud detection.
*Fund I owns both restricted and unrestricted stock. Fund I's
holdings of restricted stock are valued at a 20% discount to the
public market valuation shown in the table.
CommSite International, Inc., Vienna, VA ("CommSite")
Initial Investment Date: April 1996
Total Investment: $2.7 million
Total Proceeds:** $2.8 million
CommSite is a provider of wireless towers and construction services.
On May 13, 1999, American Tower Corporation, a publicly traded
company, acquired CommSite.
**Total proceeds include estimate of additional milestone payments to
CommSite from American Tower.
Corsair Communications, Inc., Palo Alto, CA ("Corsair")
Initial Investment Date: October 1996
Total Investment: $3.0 million
Total Investment Value: $4.8 million
Corsair (NASDAQ: CAIR) is a wireless communication infrastructure
company providing pre-paid wireless handset and fraud detection
software and services.
LifeMinders, Inc., Herndon, VA ("LifeMinders")
Initial Investment Date: February 1999
Total Investment: $11.5 million
Total Investment Value:*** $105.3 million
LifeMinders (NASDAQ: LFMN) 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 July 31, 2000, the company had
approximately 15 million members and numerous advertising partners.
LifeMinders has experienced significant membership growth since our
initial investment in February 1999, when the company had less than
50,000 members. LifeMinders held its initial public offering in
November 1999. Fund II has invested $11.5 million in LifeMinders at
an average cost of $2.70 per share and the company's stock, as of
July 31, 2000, was trading at $22.50 per share.
***Fund II's holdings are restricted as to resale and are valued at a
25% discount to the public market valuation shown in the table.
QuickLogic Corporation, Sunnyvale, CA ("QuickLogic")
Initial Investment Date: November 1996
Total Investment: $3.0 million
Total Investment Value: $9.5 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. QuickLogic held its initial public
offering in October 1999.
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.
Signius Corporation (formerly known as ProCommunications
Corp.), Somerset, NJ ("Signius")
Initial Investment Date: September 1996
Total Investment: $3.4 million
Total Investment Value: $0
Signius provides telemessaging services for small and medium-sized
businesses. In March 2000, Signius was sold for a nominal amount.
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
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.
PRIVATE COMPANIES
Advantage Schools, Inc., Boston, MA ("Advantage")
Initial Investment Date: June 1998
Total Investment: $4.6 million
Investment Carrying Value: $10.9 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
capitalization rates generally consistent with those received by
other schools in the district. Founded in 1996, Advantage currently
manages 15 schools across the country.
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.
BPA Systems, Inc., Austin, TX ("BPA")
Initial Investment Date: June 2000
Total Investment: $5.0 million
Investment Carrying Value: $5.0 million
BPA develops fulfillment software solutions that help
Internet-enabled companies rapidly take advantage of e-commerce
opportunities. The BPA product suite allows large global companies as
well as internet startups to fully integrate their existing supply
chains with their e-commerce web sites.
Captura Software, Inc., Bothell, WA ("Captura")
Initial Investment Date: February 1999
Total Investment: $4.8 million
Investment Carrying Value: $7.9 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 Inc., 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.
Curon Medical, Inc., Sunnyvale, CA ("Curon")
Initial Investment Date: December 1999
Total Investment: $7.6 million
Investment Carrying Value: $7.6 million
Curon develops and markets medical devices for the treatment of
gastrointestinal diseases using radio frequency delivered through a
catheter. Curon had developed a product targeting gastroesophageal
reflux disease that received 510(k) clearance from the Food and Drug
Administration in April 2000. Curon filed its S-1 for Initial Public
Offering on May 25, 2000.
ePod Corporation, New York, NY ("ePod")
Initial Investment Date: December 1999
Total Investment: $1.6 million
Investment Carrying Value: $2.6 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.
firstsource Corporation, 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 businesses.
With approximately 250,000 SKUs (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.
KillerBiz, Inc., Fremont, CA ("KillerBiz")
Initial Investment Date: December 1999
Total Investment: $0.6 million
Investment Carrying Value: $0.6 million
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.
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 self 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.
Managemark, Inc., Sunnyvale, CA ("Managemark")
Initial Investment Date: June 1999
Total Investment: $5.5 million
Investment Carrying Value: $5.5 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.
MarketFirst Software, Inc., Mountain View, CA ("MarketFirst")
Initial Investment Date: August 1999
Total Investment: $5.8 million
Investment Carrying Value: $5.8 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.
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-consumer and business-to-business Internet
commerce site aimed at selling gardening and related horticultural
products, as well as providing associated content to the gardening
community. 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.
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 $5.7 million
Investment Carrying Value: $5.7 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 Corp., 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, 2000.
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.
INVESTMENTS WRITTEN-OFF
AbTox, Inc., Mundelein, IL ("AbTox")
Initial Investment Date: March 1997
Total Investment: $2.8 million
Total Investment Value: $0
AbTox, a manufacturer of gas plasma sterilizers, has filed for
bankruptcy due to operating problems arising from regulatory issues
related to one of its products.
Cardiopulmonary Corporation, Milford, CT
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. Fund I's position has been
written down pursuant to a recent recapitalization of the company.
P2 Holdings Corp. (formerly known as Plynetics 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. Fund I 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 and
Fund I's $2.1 million investment was written off.
PRIVATE FUNDS
Advanced Technology Ventures V, LP ("ATV V")
Fund Size: $175 million
Investment commitment: $3.0 million
ATV V is an early-stage focused fund targeting information technology
and health care markets. Since 1979, ATV V has invested in and worked
with over 100 emerging companies, including Actel, Berkeley Networks,
Cadence Design Systems, Epigram and VLSI Technology.
Allegra Capital 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 III's principals have been
investors in Autotote, Axent Technologies, Business Evolution and
Viasoft.
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 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 Associates III, LP
Fund Size: $360 million
Investment commitment: $5 million
See Brentwood II above.
Broadview Capital II, 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
with substantial resources to make its investments.
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.
Commonwealth Capital Ventures II, LP ("Commonwealth II")
Fund Size: $80 million
Investment commitment: $4.0 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 II 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: $5.0 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.
Friedman, Fleischer & Lowe, LP ("Friedman, Fleischer & Lowe")
Fund Size: $325 million
Investment commitment: $5.0 million
Friedman, Fleischer & Lowe is a first-time fund focused exclusively
on participation in middle-market buyouts. The principals of
Friedman, 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: $5.0 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: $5.0 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 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 and Guidant, as
well as several cash distributions.
Morgenthaler Venture Partners V, LP
Fund Size: $300 million
Investment commitment: $8.0 million
See MVP IV above.
Quad-C Partners V, LP ("Quad-C")
Fund Size: $300 million
Investment commitment: $5.0 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 Fund V, LP ("Sevin Rosen V")
Fund Size: $160 million
Investment commitment: $2.0 million
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 V
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, LP
Fund Size: $165 million
Investment commitment: $2.5 million
See Sevin Rosen V above.
Trinity Ventures VI, LP ("Trinity VI")
Fund Size: $140 million
Investment commitment: $3.0 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.
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.
THE FOREGOING INFORMATION WITH RESPECT TO FUND I AND FUND II IS
PRESENTED TO ILLUSTRATE THE TYPES OF INVESTMENTS THAT THE INVESTMENT
ADVISER AND INVESTMENT SUB-ADVISER HAVE 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 GAINS OR LOSSES THAT THE PORTFOLIO WILL EXPERIENCE ON
ITS INVESTMENTS. IN ADDITION, THE PORTFOLIO MAY MAKE INVESTMENTS IN A WIDE
RANGE OF BUSINESSES AND ENTITIES AND THE FOREGOING INFORMATION SHOULD NOT
BE VIEWED AS REPRESENTATIVE OF THE PORTFOLIO'S ACTUAL PORTFOLIO. 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 UNITED STATES TRUST COMPANY
OF NEW YORK'S DETERMINATION OF THE CURRENT VALUE OF THE INVESTMENTS, WHICH
DETERMINATION ORDINARILY INVOLVES A HIGH DEGREE OF JUDGMENT AND
SUBJECTIVITY (SEE "VALUATION OF PORTFOLIO SECURITIES"). UPON DISPOSITION,
FUND I AND FUND II MAY REALIZE MORE OR LESS THAN THE 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, through the funds' most recent fiscal quarter ended
July 31, 2000 calculated in conformity with the standardized performance
methodology required by the Securities and Exchange Commission.
1-Year 3-Year Since Inception
UST Private Equity Investors Fund, Inc. 41.13% 3.36 % 6.71%
Excelsior Private Equity Fund II, Inc. 47.16% N/A 24.94%
CODE OF ETHICS
The Fund, the Portfolio, the Distributor, the Fund's
Adviser/Investment Adviser and the Investment Sub-Adviser have adopted
codes of ethics under Rule 17j-1 of the Investment Company Act that
restrict the personal securities transactions of certain associated persons
of the Fund, the Portfolio, the Distributor, the Fund's Adviser/Investment
Adviser and the Investment Sub-Adviser. The primary purpose of such codes
is to ensure that personal trading by their respective employees does not
disadvantage the Fund or the Portfolio. U.S. Trust portfolio managers and
other investment personnel who comply with the code of ethic's
pre-clearance 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 codes 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 codes of ethics are 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 Fund's Operating Agreement, the business and affairs
of the Fund will be managed under the direction of its Board of Managers.
Pursuant to the Portfolio's operating agreement, the business and affairs
of the Portfolio will be managed under the direction of its board of
managers. The Board of Managers of the Fund consists of the same persons as
the board of managers of the Portfolio. The following are descriptions of
the members of the boards of managers and the officers of the Fund and the
Portfolio, as well as of key employees of the investment advisers,
including the members of the Investment Sub-Adviser's Investment Committee.
Unless otherwise noted, each member of the Investment Sub-Adviser's
Investment Committee has been an employee of United States Trust Company of
New York 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. Mr. Hover may be deemed an "interested person" of the Fund and the
Portfolio, as defined in the Investment Company Act, on the basis of his
affiliation with U.S. Trust.
Board of Managers
Gene M. Bernstein (53). As of September 1, 2000, Mr. Bernstein is the
Dean of the Skodneck Business Development Center at Hofstra University in
Hempstead, New York. Prior to that, he worked at (and remains a principal
of) Northville Industries Corp., a third generation privately held
petroleum marketing, trading, storage and distribution company since 1994.
While at Northville he held positions ranging from Vice President to
President to Vice-Chairman. Prior to working at Northville Industries, he
taught at the University of Notre Dame. He is Chairman of the Board of
Trustees at his alma mater, Alfred University, from which he holds a B.A.
degree in English Literature. He also has a M.A. degree in English
Literature from the University of Wisconsin and a Ph.D. in English
Literature from the University of Massachusetts. Mr. Bernstein serves as a
director/manager of Fund I, Fund II, the Excelsior Hedge Fund of Funds I,
LLC and the Portfolio.
John C. Hover II (57).* Mr. Hover retired as Executive Vice
President of the United States Trust Company of New York in 1998
after 22 years of service. He was responsible for the Personal
Asset Management and Private Banking Group and served as Chairman
of U.S. Trust International. Prior to joining United States Trust
Company of New York, he was a commercial banker with Chemical
Bank. Mr. Hover received his B.A. degree in English Literature
from the University of Pennsylvania and a M.B.A. degree in
Marketing from The Wharton School. He is a trustee of the
University of Pennsylvania, and is Chairman of the Board of
Overseers of the University's Museum of Archaeology and
Anthropology. He is a trustee and Vice President of the Penn Club
of New York. Mr. Hover serves as chairman of the board of
directors/managers of Fund I, Fund II and the Portfolio.
Stephen V. Murphy (54). Since 1991, Mr. Murphy has been
President of S. V. Murphy & Co., Inc., an investment banking firm
that specializes in mergers and acquisitions, divestitures and
strategic and capital-related advisory services for financial and
other institutions. From 1988 until 1990, he was Managing Director
of Merrill Lynch Capital Markets in charge of the Financial
Institutions Mergers and Acquisitions Department. Prior to 1988,
Mr. Murphy was Managing Director of The First Boston Corporation
where he headed up its Investment Banking Department's Commercial
Bank Group. Mr. Murphy holds a B.S.B.A. degree from Georgetown
University and a M.B.A. degree from Columbia University. Mr.
Murphy serves as a director/manager of Fund I, Fund II, the
Excelsior Hedge Fund of Funds I, LLC and the Portfolio.
Victor F. Imbimbo, Jr. (47). Victor Imbimbo was the founder
in 1996 of Bedrock Communications, Inc. a consulting company
addressing the merger of traditional and digital communications
solutions. He was also the founder of the Hadley Group, a
promotional marketing company, in 1985, which he ran until 1996.
Mr. Imbimbo serves as a director/manager of Fund I, Fund II, the
Excelsior Hedge Fund of Funds I, LLC and the Portfolio.
Officers
David I. Fann (36) is Co-Chief Executive Officer and
President of the Fund and the Portfolio and Managing Director of
United States Trust Company of New York. Mr. Fann serves as
President and Chief Executive Officer of Fund I and Fund II. He is
focused on Direct Investments in information services and life
sciences. Prior to joining United States Trust Company of New York
in April 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 Special Fiduciary Committee. Mr. Fann is on the
boards of Classroom Connect, Inc., Curon Medical, Inc., SurVivaLink
Corp. and Protogene Laboratories, Inc.
Douglas A. Lindgren (38) is Co-Chief Executive Officer and
Chief Investment Officer of the Fund and the Portfolio and Managing
Director of United States Trust Company of New York. Mr. Lindgren
is Chief Investment Officer of Fund II and Executive Vice President
of Fund I. He is focused on Direct Investments in information
technology, information services and communications. Prior to
joining United States Trust Company of New York in April 1995, Mr.
Lindgren served in various capacities for Inco Venture Capital
Management ("IVCM") from January 1988 through March 1995, including
President and Managing Principal from January 1993 through March
1995. While at IVCM, Mr. Lindgren invested in venture capital and
buyout transactions and served on the board of directors of several
of its portfolio companies. Before joining IVCM, Mr. Lindgren was
employed by Salomon Brothers, Inc. and Smith Barney, Harris Upham &
Co., Inc. He is an Adjunct Professor of Finance at Columbia
University's Graduate School of Business, where he 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 boards of PowerSmart, Inc., MarketFirst Software, Inc.,
Constellar Corporation, ReleaseNow.com, Corp., LifeMinders, Inc.,
Zeus Wireless, Inc. and firstsource Corporation.
Alan Braverman (39) is Executive Vice President of the Fund
and the Portfolio and a Managing Director of United States Trust
Company of New York. He is focused on Direct Investments in
information technology, information services and communications.
Prior to joining United States Trust Company of New York in
September 2000, Mr. Braverman served as President,
Business-to-Business at NBCi since November 1999. Previously, Mr.
Braverman was Head of Internet Research at several top-level Wall
Street firms. Mr. Braverman was also ranked by Institutional
Investor and the Wall Street Journal as one of the top Internet
research analysts on Wall Street. Mr. Braverman worked at Banc of
America Securities and held the position of Senior Managing
Director and Head of Internet Research there until November 1999.
Mr. Braverman was Managing Director and Head of Internet Research
at Deutsche Bank Securities, the investment banking arm of Deutsche
Bank Group. From July 1996 to July 1998, he was the senior
Internet analyst at Credit Suisse First Boston. From 1995 to July
1996, Mr. Braverman was Vice President, Internet Analysis at
Hanifen Imhoff. From 1991 to 1995, Mr. Braverman served as a
senior executive at U.S. West as well as General Manager for
CityKey Online, where he oversaw the national roll-out for the
company's online business. Mr. Braverman earned a B.B.A. in
Finance and Strategy from The Wharton School of the University of
Pennsylvania and a M.B.A. in Finance, Strategy and Marketing from
Northwestern University's Kellogg Graduate School of Management.
Lee A. Gardella (33) is Vice President of the Fund and the
Portfolio and Vice President of United States Trust Company of New
York, joined United States Trust Company 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, N.J. 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 a M.B.A. from the University of Notre
Dam and a B.S.B.A. in Finance from Shippensburg University. Mr.
Gardella is a Chartered Financial Analyst. Mr. Gardella is on the
board of BPA Systems.
James F. Rorer (30) is Vice President of the Fund and the Portfolio
and United States Trust Company of New York. Mr. Rorer is focused on Direct
Investments in information services and life sciences. Prior to joining
United States Trust Company of New York 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,
providing strategic due diligence services to large private equity 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
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 a M.B.A. from
Harvard Business School.
James F. Dorment (27) Chief Administrative Officer and Secretary of
the Fund and the Portfolio and Assistant Vice President of United States
Trust Company of New York, has been with the Private Equity Division of
United States Trust Company 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 United States Trust Company of New York. Mr. Dorment graduated
from Bates College with a B.A. 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.
Brian F. Schmidt (41) is Chief Financial Officer of the Fund
and the Portfolio and Senior Vice President of U.S. Trust Company.
Mr. Schmidt is the Chief Financial Officer of Fund I and Fund II.
He is the Division Manager of Mutual Funds with U.S. Trust
Company. He is responsible for the operation and administration of
the Excelsior Family of Funds and the U.S. Trust Company Common
Trust Funds. Mr. Schmidt joined U.S. Trust Company 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 20 years of experience in
financial services, concentrating in mutual funds. He received his
B.S. degree from Marist College. He is on the Accountant's and
Treasurer's Committee of the Investment Company Institute.
Frank D. Bruno (40) is Treasurer of the Fund and the
Portfolio and Vice President of U.S. Trust Company. Mr. Bruno is a
Vice President in the Mutual Funds Administration Department of an
affiliate of U.S. Trust Company. Prior to joining U.S. Trust
Company, he worked for the Dreyfus Corporation and
PriceWaterhouse. Mr. Bruno received his B.S. degree from The
Pennsylvania State University.
Investment Committee of the Investment Sub-Adviser
Frederick B. Taylor (58) is Chairman of the Investment Committee. Mr.
Taylor is Vice Chairman and Chief Investment Officer of United States Trust
Company of New York and is a member of the board of directors and Chairman
of the Portfolio Policy Committee. He has been with United States Trust
Company of New York 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) is Co-Chairman of the Investment
Committee. Mr. Napoli is an Executive Vice President of United
States Trust Company of New York 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 Adviser. Mr.
Napoli is a member of the New York Society of Security Analysts and
the Association of Investment Management and Research.
John J. Apruzzese (42) is Managing Director and Senior
Portfolio Manager of United States Trust Company of New York. 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 Advisers of Outward
Bound.
Richard L. Bayles (56) is Managing Director and Senior
Portfolio Manager of United States Trust Company of New York. Mr.
Bayles manages the 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 of the Mid
Manhattan Performing Arts Foundation.
Edith A. Cassidy (47) is Managing Director and Division
Manager at United States 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 United States Trust Company of New York'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.
Katherine T. Ellis (36) is Senior Vice President and Senior
Portfolio Manager of United States Trust Company of New York. Ms.
Ellis is a Division Manager in the Wealth Management Group. She is
a member of the Portfolio Policy Committee. She earned her B.A. in
Political Science from Wellesley College and her M.B.A. with
Distinction in Finance from the Stern School where she was
designated a Stern Scholar as well as a member of the Beta Gamma
Sigma Honor Society. Ms. Ellis holds the designation of Chartered
Financial Analyst and is a member of the New York Society of
Security Analysts and the Association of Investment Management and
Research.
William V. Ferdinand (58) is 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 United
States Trust Company of New York. With over 30 years of investment
management experience, he comes to U.S. Trust Company 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
Chartered Financial Analyst and received a B.S. degree from the
University of Pennsylvania Wharton School of Business. He earned
his M.B.A. 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) is Senior Vice President of U.S.
Trust Company of New Jersey. Prior to joining U.S. Trust Company
of New Jersey, 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 B.S. 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) is Managing Director of United States
Trust Company of New York. Mr. Pettee is currently the Director of
Equity Research at United States Trust Company of New York. He is
responsible for supporting over 100 portfolio managers with more
than $40 billion in equity assets under management with proprietary
analysis from the research department. Prior to joining United
States Trust Company of New York, 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.
Rosemary Sagar (40) is Managing Director of United States
Trust Company of New York. Ms. Sagar is responsible for U.S. Trust
Company's Global Investment Division. She is responsible for
overseeing U.S. Trust's international investment activities,
including portfolio management, research and trading. Prior to
joining U.S. Trust, Ms. Sagar was senior vice president for
international equities for GE Investments in Stamford,
Connecticut. She was also Chairman of GE (UK) Common Investment
Fund, GE Company's largest pension fund outside North America, and
a member of the board of the GE Netherlands Pension Fund. From
1987 to 1990, Ms. Sagar was associate director of research for
Baring Securities. Previously, she held positions as a vice
president at Drexel Burnham Lambert and as an analyst with Morgan
Stanley. Ms. Sagar is a member of the Advisory Board of the Paris
Stock Exchange. She is a Chartered Financial Analyst. She
received her M.B.A. from Columbia University, her undergraduate
degree from Boston University (summa cum laude) and studied at the
Sorbonne in Paris.
Harvey A. Seline (61) is a Managing Director and Senior
Portfolio Manager of United States Trust Company of New York. Mr.
Seline is a Division Manager in the Personal Wealth Management
Group. He has been with United States Trust Company of New York
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) is Managing Director and Senior
Portfolio Manager of United States Trust Company of New York. 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.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) is Managing Director and Senior
Portfolio Manager of United States Trust Company of New York. Mr.
Tillson is a Division Manager in the Personal Wealth Management
Group. Prior to joining United States Trust Company of New York,
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 Advisers. 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 M.B.A. 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 H. Weiss (45) is Managing Director of United States
Trust Company of New York and Manager of Institutional Equity and
Balanced Portfolios. Mr. Weiss has been with the United States
Trust Company of New York since September of 1993. Prior to
joining United States Trust Company of New York, 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 M.B.A. from the
University of Chicago.
David J. Williams (58) is Managing Director and Senior
Portfolio Manager of United States Trust Company of New York. He
is a member of United States Trust Company of New York's Investment
Policy Committee and manages the Excelsior 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) is Managing Director and Senior
Portfolio Manager of United States Trust Company of New York. Mr.
Whiteley is a Division Manager in the Personal Wealth Management
Group. He joined the United States Trust Company of New York in
1995. Prior to joining United States Trust Company of New York, 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 Managers will receive $750 annually and
$500 per Fund meeting attended, paid by the Fund. No member of the Board of
Managers or officer will receive aggregate compensation from the Fund and
the Portfolio in excess of $17,000 for fiscal year 2000. Members of the
Board of Managers are also entitled to reimbursement of their actual
out-of-pocket expenses incurred in connection with their attendance at
meetings of the Board of Managers. Neither the Fund nor the Portfolio has a
stock option plan, other long-term incentive plan, retirement plan or other
retirement benefits.
ESTIMATED COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
ESTIMATED COMPENSATION
AGGREGATE AGGREGATE PENSION OR RETIREMENT ANNUAL FROM PORTFOLIO
NAME OF PERSON, COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON AND FUND
POSITION FROM THE FUND FROM THE PORTFOLIO PART OF FUND EXPENSES RETIREMENT COMPLEX1
<S> <C> <C> <C> <C> <C>
John C. Hover, II*
Manager $1,750 $9,750 0 0 $53,500 (4
Funds)
Gene M. Bernstein,
Manager $1,750 $9,750 0 0 $59,750 (5
Funds)
Steven V. Murphy,
Manager $1,750 $9,750 0 0 $59,750 (5
Funds)
Victor F. Imbimbo, Jr. $1,750 $9,750 0 0 $55,250 (5
Manager Funds)
</TABLE>
-------------------
1 The total compensation paid to such persons by the Fund, the
Portfolio and the Fund Complex is estimated for the fiscal year
ending October 31, 2000. The parenthetical number represents the
number of investment companies (including the Fund and the Portfolio)
from which such person receives compensation that are considered part
of the same Fund Complex as the Fund.
* Interested person of the Fund and the Portfolio.
CONTROL PERSONS
Upon completion of the offering, no person is expected to have voting
control over the Fund.
CUSTODIAN AND TRANSFER AGENT
PFPC Trust Company ("PFPC Trust") will serve as the Fund's and the
Portfolio's custodian in accordance with the provisions of the Investment
Company Act and the rules and regulations thereunder. As such, PFPC Trust
will be responsible for holding the Fund's and the Portfolio's cash and
portfolio securities. PFPC Trust will also serve as the transfer agent and
distribution paying agent for the Fund's Units. For its custodian, transfer
agency and paying agency services, PFPC Trust will receive customary fees
from the Fund and the Portfolio. PFPC Trust's address is: PFPC Trust
Company, 8800 Tinicum Boulevard, 3rd Floor, Suite 200, Philadelphia,
Pennsylvania 19153.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Subject to policies established by the Board of Managers, the Fund's
Adviser will arrange for the execution of the Fund's portfolio transactions
and the allocation of brokerage. Subject to policies established by the
Portfolio's board of managers, the Investment Adviser or Investment
Sub-Adviser will arrange for the execution of the Portfolio's portfolio
transactions and the allocation of brokerage. For purposes of this
discussion, the Fund's Adviser, the Investment Adviser and the Investment
Sub-Adviser are referred to collectively as the Advisers. In executing
portfolio transactions, the Advisers will seek to obtain the most favorable
execution of portfolio transactions that is the best combination of net
price and prompt reliable execution. In the Advisers' opinions, 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 Portfolio or the Fund will
invest may be traded in the over-the-counter markets, and the Portfolio and
Fund intend 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 Portfolio or the Fund generally are prohibited
from dealing with them 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 Portfolio and
Fund will not deal with affiliated persons as principal in such
transactions; however, affiliated persons of the Portfolio or the Fund may
serve as 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 Portfolio or the Fund is a market maker in
the securities of a company, the affiliated person will not serve as the
Portfolio's or the Fund's broker in the purchase of such securities.
The Advisers have no obligation to deal with any broker or group of
brokers in the execution of transactions. With respect to certain
securities, portfolio transactions may be effected through affiliates of
the Advisers, provided it is consistent with the policy of obtaining the
most favorable execution. The Fund's and the Portfolio's boards of managers
have 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 Fund and the
Portfolio may also take into consideration the fact that a particular
broker may, in addition to execution capability, provide other services to
the Fund, the Portfolio or the Advisers and their affiliates, 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
Advisers and do not reduce the investment advisory fees payable by the
Portfolio or the Fund. Such services may be useful to the Advisers in
serving the Fund and the Portfolio and other clients and, conversely,
research services obtained by the placement of brokerage business of other
clients may be useful to the Advisers in carrying out their obligations to
the Fund and the Portfolio. The Advisers might incur significant expense
were they to purchase such research services.
PORTFOLIO TURNOVER
Because the investments of the Portfolio generally require relatively
long periods of time to reach maturity, it is expected that the Portfolio's
investment turnover will be low. There is, however, no policy limitation on
the ability of the Portfolio to sell an investment after a short period of
time. Any short-term securities in which the Portfolio or the Fund invest
will have a high rate of turnover.
Portfolio turnover will generally involve some expense, 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 Advisers Act of 1940, as amended (the "Investment
Advisers Act"), generally prohibits an investment adviser from entering
into an investment advisory contract with an investment company that
provides for compensation to the investment adviser on the basis of a share
of capital gains upon or capital appreciation of the funds or any portion
of the funds of the investment company. In 1980, Congress enacted the Small
Business Investment Incentive Act of 1980 which added provisions to the
Investment Advisers Act which permit the payment of compensation to an
investment adviser to a BDC based on capital gains.
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 investment company as
those terms are defined in the Investment Company Act. The following is a
brief description of certain provisions 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
Portfolio 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
Portfolio's investment assets consists of qualifying assets. Qualifying
assets include: (i) securities of companies that were eligible portfolio
companies at the time the Portfolio 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 Portfolio's
initial acquisition of their securities but are no longer eligible,
provided that the Portfolio 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 Portfolio in securities of commercial banking
organizations.
The Portfolio 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 Portfolio 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 Portfolio Units unless the
asset coverage ratio is at least 200% at the time of the distribution or
repurchase.
After this offering, the Portfolio 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
the Fund.
Under the Investment Company Act as amended by the Small Business
Investment Incentive Act of 1980, certain of the transactions involving the
Portfolio 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 Portfolio's board of managers having no
financial interest in the transactions. Certain transactions involving
certain closely affiliated persons of the Portfolio, including the
Investment Adviser, the Investment Sub-Adviser 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 (including the Fund), (ii) any director,
executive officer, or general partner of that person, and (iii) any person
who directly or indirectly controls, is controlled by, or is under common
control with, that person, must obtain the prior approval of a majority of
the disinterested members of the Portfolio's board of managers and, in some
situations, the prior approval of the Commission, before engaging in
certain transactions involving the Portfolio or any company controlled by
the Portfolio. The Investment Company Act and applicable rules thereunder
generally do not restrict transactions between the Portfolio and its
Portfolio Companies. In accordance with the Investment Company Act, a
majority of the members of the Fund's and the Portfolio's boards of
managers are not interested persons as defined in the Investment Company
Act. See "Management."
VALUATION OF PORTFOLIO SECURITIES
The valuation of the Fund's assets is dependent on the valuation of
the Portfolio's portfolio securities. Because the Fund invests its assets
in interests in the Portfolio, the Fund's net asset value will reflect the
value of its interest in the Portfolio (which, in turn, reflects the
underlying value of the Portfolio's assets and liabilities). Under the
supervision of and in accordance with procedures adopted by the Portfolio's
board of managers, the Investment Adviser or Investment Sub-Adviser or a
committee of the Portfolio's board of managers will value the securities in
the Portfolio's portfolio quarterly and at such other time as, in the
Portfolio's board of manager's view, circumstances warrant. In the event of
a sale by the Portfolio of its units, the Portfolio must determine the net
asset value (the "NAV") of a Portfolio 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 Portfolio Unit, (i) the value of
the assets of the Portfolio, including its portfolio securities, will be
determined by the Investment Adviser or Investment Sub-Adviser or a
committee of the Portfolio's board of managers under the supervision of the
Portfolio's board of managers, (ii) the Portfolio's liabilities will be
subtracted therefrom and (iii) the difference will be divided by the number
of outstanding Portfolio Units. For purposes of this calculation, any
amount of the Incentive Carried Interest, calculated as if all gains on
investments were realized gains, that the Investment Adviser would be
entitled to distribution of if the Portfolio had cash available for
distribution will be treated as a liability of the Portfolio.
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 or Investment Sub-Adviser or a committee of the
Portfolio's board of managers under the supervision of the Portfolio's
board of managers and pursuant to procedures established and periodically
reviewed by the Portfolio's 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 shall be valued based upon their original cost to the
Portfolio, until developments positively or negatively affecting the
Portfolio Company provide a sufficient basis for use of a valuation other
than cost (such as changes in the Portfolio Company's prospects or reliable
private sales of a Portfolio Company's securities at prices different from
the value initially used by management). Such developments may occur
shortly after the Portfolio's original investment, or after a longer
period. Upon the occurrence of developments providing a sufficient basis
for a change in valuation, venture capital investments will be valued by
the private market or appraisal methods of valuation. The Portfolio shall
use reliable third party transactions (actual or proposed) in Portfolio
Company securities as a basis of valuation. This private market method
shall only be used with respect to actual transactions or actual firm
offers by sophisticated, independent investors. The appraisal method shall
be based upon such factors affecting the Portfolio Company as earnings, net
worth, reliable private sale prices of the Portfolio Company's securities,
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.
The values for the investments referred to in this paragraph will be
estimated regularly by the Investment Adviser or Investment Sub-Adviser or
a committee of the Portfolio's board of managers 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 Portfolio from the investments.
The Portfolio 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 or Investment Sub-Adviser or a committee of the Portfolio's board
of managers 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 Portfolio,
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 an established trading market does not
exist, valuations will be made consistent with the "going concern" method
described above.
The Portfolio's investments in Private Funds generally will be valued
based upon the Portfolio'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 and 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 or
Investment Sub-Adviser, the Investment Adviser or Investment Sub-Adviser,
under supervision of the Portfolio's board of managers, will determine such
value based on the Investment Adviser's or Investment Sub-Adviser's
judgment of fair value on the appropriate date, less applicable charges, if
any.
To the extent that the Fund holds any assets directly, it will value
such assets consistent with the valuation procedures of the Portfolio
described above.
CAPITAL ACCOUNTS, ALLOCATIONS AND DISTRIBUTIONS
Investors in the Fund will become members in the Fund, 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. All allocations and
distributions made by the Fund will generally be made pro rata in
proportion to each member's interest in the Fund. The Fund will in turn
become a member of the Portfolio, which will maintain capital accounts and
make allocations and distributions as discussed below.
Capital Accounts. The Portfolio will establish a capital account for
each investor who becomes a member of the Portfolio, including the Fund.
Capital contributions and the member's share of items of income and gain
will be credited to the member's capital account, and distributions and the
member's share of items of loss, deduction and expense will be debited from
the member's capital account. The Portfolio will establish a capital
account for the Investment Adviser to which allocations in respect of the
Incentive Carried Interest will be made.
Allocations. The income, gain, loss, deduction and expense of the
Portfolio will be determined and allocated as of the end of each tax year
(typically December 31) to reflect the economic interests of the members
and the Investment Adviser.
Each year, Portfolio allocations generally will be made in the
following order:
o gains will be allocated to the Investment Adviser until the
cumulative amount of all gains that has been allocated to the
Investment Adviser from the commencement of operations equals the
Incentive Carried Interest calculated through the end of the
period for which the allocation is being made; then
o all remaining items of income, gain, loss, deduction and expense
will be allocated to the members pro rata in accordance with
their capital contributions.
For any given period, the allocation of gain to the Investment
Adviser 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.
For any given period, the Incentive Carried Interest will be an
amount equal to 20% of the excess, if any, of the cumulative amount of all
capital gains realized by the Portfolio on Direct Investments from the
commencement of operations through the end of such period over the sum of:
o the cumulative amount of all capital losses realized by the
Portfolio on all investments of any type from the commencement of
operations through the end of such period; and
o the amount of net unrealized capital depreciation on all
investments of any type determined as of the close of such
period.
To the extent that the Portfolio distributes property in kind, the
Portfolio will be deemed to have realized gain or loss on such property
based on the value assigned to such property in accordance with the
Portfolio's valuation procedures. In the event of the resignation or
removal of the Investment Adviser or other termination without
reinstatement of the Portfolio's investment advisory agreement with the
Investment Adviser or an affiliate, the assets of the Portfolio will be
valued in accordance with the Portfolio's operating agreement as of the
date of resignation, removal or termination, and the Portfolio will be
deemed to have realized gain or loss on such assets based on the valuations
so assigned.
Notwithstanding the foregoing, the Portfolio may, in its sole and
absolute discretion, make special allocations of items of Portfolio income,
gain, loss, deduction and expense in order to cause the capital account
balances of the members and the Investment Adviser to reflect the economic
arrangement set forth in the following paragraph.
Distributions. The Fund will distribute all cash that the Fund's
Adviser does not expect to use in the operation of the Fund and that is
available after the payment of all expenses then due and the creation of
any reserves. As discussed below, due to the nature of the Portfolio's
investments, investors in the Fund should not expect distributions of cash
or property during the first several years of the Fund's operations. The
Fund will not reinvest income from its investments or the proceeds from the
sale of its investments. The Fund does not intend to make any distribution
if, after making such distribution, the liabilities of the Fund would
exceed the fair value of the Fund's assets.
The Portfolio will distribute all cash that the Investment Adviser
does not expect to use in the operation of the Portfolio and that is
available after the payment of all expenses then due and the creation of
any reserves. The Portfolio will consider such distributions at least
annually but, as described below, does not expect to make distributions of
cash or property during the first several years of operations. Each year,
the Investment Adviser generally will be entitled to a distribution equal
to the Incentive Carried Interest. The members, including the Fund,
generally will be entitled to all amounts remaining for distribution pro
rata in accordance with their capital contributions. Upon liquidation of
the Portfolio, any cash or other property available for distribution will
be distributed to the members, including the Fund, and to the Investment
Adviser pro rata in accordance with their respective capital account
balances. The Investment Adviser's capital account balance generally will
reflect the allocations that have been made to the Investment Adviser in
respect of the Incentive Carried Interest but that have not been previously
distributed to the Investment Adviser.
Due to the nature of the Portfolio's investments, investors should
not expect to receive distributions of cash or property during the first
several years of the Portfolio's and the Fund's operations. The Portfolio
will not reinvest income from its investments or the proceeds from the sale
of its investments, in each case other than in Short-Term Investments,
except to make follow-on investments. The Portfolio may make distributions
in kind of its property, which generally would be treated for purposes of
the Portfolio'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 Portfolio's valuation procedures. The Portfolio does
not intend to make any distributions if after making such distribution the
liabilities of the Portfolio would exceed the fair value of the Portfolio's
assets.
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 Fund and the Portfolio" below, counsel to
the Fund has not rendered any legal opinion regarding any tax consequences
relating to the Fund or the Portfolio or an investment in the Fund. 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 ADVISERS 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 FUND AND THE PORTFOLIO. At the first subscription
closing, the Fund 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 Fund will be treated as a
partnership and not as a "publicly traded partnership" that is treated as a
corporation for federal income tax purposes. The Portfolio will receive a
similar opinion from counsel on or before the first subscription closing
for the Portfolio. An opinion of counsel is not binding on the IRS or any
court.
A limited liability company that is registered as an investment
company under the Investment Company Act (in the case of the Fund) or that
has elected to be treated as a business development company under the
Investment Company Act (in the case of the Portfolio) would be treated as a
corporation for federal income tax purposes if it were to become a publicly
traded partnership. A publicly traded partnership is a partnership (or
limited liability company intended to be treated as a partnership) the
interests of which are either traded on an established securities market or
readily tradable on a secondary market (or the substantial equivalent
thereof). Each of the Fund and the Fund's Adviser has represented to
counsel for the Fund 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. Similarly, each of the Portfolio, the Investment
Adviser and the Investment Sub-Adviser has represented to counsel for the
Portfolio 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 agreements for the Fund and the Portfolio
impose significant restrictions on transfer of interests of the respective
entities in order to address this point. By subscribing for Units, each
member agrees to indemnify and hold harmless the Fund, the Fund's Adviser,
the Distributor, each other member and any successor or assign of any of
the foregoing, from and 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. A similar indemnification is required to be made by
a permitted transferee of Units. Members of the Portfolio (including the
Fund) and permitted transferees of Portfolio interests will similarly
indemnify the Portfolio, the Investment Adviser, the Investment
Sub-Adviser, each other member of the Portfolio and any successor or assign
of any of the foregoing.
Ultimately, counsel's opinion as to the treatment of the Fund and
Portfolio as partnerships for federal income tax purposes will be based on,
among other things, the maintenance of factual conditions (including those
underlying the representations made to counsel), the continuation of which
cannot be assured. Counsel to the Fund and the Portfolio will not render a
tax status opinion or review such factual environment after the first
subscription closings.
If either the Fund or the Portfolio were treated as a publicly traded
partnership or otherwise treated as a corporation for federal income tax
purposes, material adverse consequences for the members would result. The
entity would be subject to tax on its income at corporate tax rates without
a deduction for any distribution to the members of such entity, thereby
materially reducing the amount of any cash available for distribution to
the members. In addition, the members of the entity would be treated as
shareholders for federal income tax purposes. Thus, capital gains and
losses and other income and deductions of the entity would not be passed
through to the members of the entity, and all distributions by the entity
to the members would be treated as dividends, return of capital and/or
gains.
The following discussion assumes that each of the Fund and the
Portfolio will continue to be treated as a partnership for federal income
tax purposes.
TAXATION OF MEMBERS OF THE FUND. By reason of the treatment of the
Fund and the Portfolio as partnerships for federal income tax purposes,
neither entity will be subject to federal income tax. Rather, with respect
to the Fund, each member in computing its federal income tax will include
his, her or its allocable share of Fund items of income, gain, loss,
deduction and expense for the taxable year of the ending within or with the
taxable year of the member. Each member's allocable share of Fund items
will include his, her or its share of the Fund's allocable share of
Portfolio items of income, gain, loss, deduction and expense.
Nonliquidating cash distributions made by the Fund to a member
generally will not be taxable to the member, except to the extent that the
amount of such cash distributions exceeds 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 the Fund distributes
both cash and other property 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
Fund'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 Fund'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 reduced by the amount
of any cash distributed in the same transaction).
For federal income tax purposes, a member's allocable share of Fund
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' interests
in the Fund. The allocations under the Operating Agreement are intended to
satisfy such requirements. If, however, the IRS successfully challenged the
Fund'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. Similar rules apply with respect to the Fund's
allocable share of Portfolio tax items.
The Fund may derive taxable income from a Portfolio investment that
is not matched by a corresponding receipt of cash. This could occur, for
example, if the Portfolio makes an investment in certain non-U.S.
corporations. See "Phantom Income from Portfolio Investments in Non-U.S.
Corporations" below. This could also occur if the Portfolio invests in an
entity that is classified as a partnership and such entity allocates income
or gain to the Portfolio without making a corresponding distribution of
cash. Moreover, the Portfolio is not required to make current distributions
of its entire earnings. In addition, a reduction of Portfolio 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 Fund 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. Fund 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 Fund 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 capital contributions to the Fund as adjusted by certain items.
Basis is generally increased by the member's allocable share of Fund
profits (and items of income and gain) and nonrecourse borrowings (as
defined for federal income tax purposes). Basis is generally decreased by
the member's allocable share of Fund losses (and items of loss, deduction
and expense), the amount of cash distributed by the Fund to the member, the
Fund's tax basis of property (other than cash) distributed by the Fund to
the member and any reduction in the member's allocable share of nonrecourse
borrowings (as defined for federal income tax purposes).
To the extent that a member's allocable share of Fund 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 Fund losses (if any) only to
the extent of each such member's "at risk" amount in the Fund 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
Fund. To the extent that a member's allocable share of Fund losses are not
allowed because the member has an insufficient amount at risk in the Fund,
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 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 Fund'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 Fund 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 their allocable shares of interest paid or
accrued by the Portfolio 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
capital gain attributable to the disposition of property held for
investment (and thus would not include any gains realized by the Portfolio
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 Portfolio 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
the borrowing will be investment interest that is subject to these
limitations. Since the amount of a member's allocable share of Portfolio
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 Portfolio
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 Fund
losses (or items of loss and deduction thereof, including the Fund's
allocable share of Portfolio items of loss and deduction). An individual,
estate or trust may deduct so-called miscellaneous itemized deductions
(which include the Portfolio management fee and certain other fees and
expenses of the Fund, the Portfolio and the 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 a member, the
allocation and distribution may be recharacterized as a fee. It is intended
that the Investment Adviser's Incentive Carried Interest constitute an
allocable share of Portfolio 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.
If the Incentive Carried Interest were characterized as a fee, members
could be subject to the limitations on deductibility relating to
miscellaneous itemized deductions and certain other itemized deductions of
high-income individuals described in the preceding paragraph.
In addition, prospective investors should be aware that certain of
the activities of the Fund and the Portfolio 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 Fund
and the Portfolio are not currently deductible, but may, at the election of
the Fund and the Portfolio (as the case may be) be amortized ratably over a
period of not less than 60 months. Syndication expenses of the Fund and the
Portfolio (i.e., expenditures made in connection with the marketing and
issuance of interests therein, including placement fees) are neither
deductible nor amortizable.
NON-U.S. CURRENCY GAINS OR LOSSES. If the Portfolio makes an
investment or obtains financing denominated in a currency other
than the U.S. dollar, then the Portfolio (and thus the Fund) may
recognize gain or loss attributable to fluctuations in such
currency relative to the U.S. dollar. The Portfolio 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 PORTFOLIO INVESTMENTS IN NON-U.S. CORPORATIONS.
It is possible that the Portfolio 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, among other things, 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. Certain dividends and interest received by the
Portfolio from sources outside of the U.S. may be subject to withholding
taxes imposed by other countries. The Portfolio 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 Fund will inform members as to their proportionate share of
non-U.S. taxes paid by the Portfolio 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 PORTFOLIO INVESTMENTS. The Portfolio (and thus the Fund) will
generally recognize capital gain or loss on the sale of its investments.
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, neither the Fund, nor the
Fund's Adviser (or any affiliate thereof) will repurchase any Units, except
that the Fund will repurchase Units upon its termination. The Portfolio has
similar transfer restrictions with respect to its Units. By subscribing for
Units, each member agrees to indemnify and hold harmless the Fund, the
Fund's Adviser, the Distributor, each other member, and any successor or
assign of any of the foregoing, from and 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. A similar
indemnification is required to be made by a permitted transferee. The
Portfolio has similar indemnities with respect to transfers of its units.
See "Risk Factors - 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 Units sold
(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 Portfolio nonrecourse borrowings (as defined for federal income
tax purposes), if any, as well as any proceeds from the sale. Thus, a
member's 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 may be affected by reason of an investment in the Fund. 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, a limited liability
company treated as a partnership 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 company
interests (in which latter case basis will be adjusted with respect to the
transferee member only). Neither the Fund nor the Portfolio currently
intends to make a Section 754 election. The board of managers for each of
the Fund and the Portfolio has sole and absolute discretion to make all tax
elections for its respective entity.
REPORTS TO MEMBERS. The Fund has the calendar year as its taxable
year. The Fund will furnish annually to each member a report containing a
Schedule K-1, which indicates each member's distributive share for each
calendar year of Fund income, gain, loss, deduction and expense for use in
the preparation of the member's income tax return. The Fund 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 Portfolio 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
Portfolio has invested. Accordingly, members may be required to obtain
extensions for filing their federal, state and local income tax returns
each year. The Fund will provide members with estimated annual federal
income tax information prior to April 15, assuming the Fund is able to
obtain such information.
TAX AUDITS. Although not required to pay any federal income tax, the
Portfolio must file a federal income tax information return each taxable
year. The IRS may audit Portfolio returns in a unified entity proceeding at
the Portfolio level. The Investment Adviser, who would represent the
Portfolio 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 Portfolio. The Investment Adviser may also
generally enter into settlement agreements with the IRS that bind the
Portfolio and consent on behalf of the Portfolio to extend the statute of
limitations for assessing a deficiency with respect to a Portfolio item.
Rules similar to those described above also apply with respect to the Fund.
Successful adjustments by the IRS of Fund or Portfolio items of income,
gain, loss, deduction or expense could change a member's federal, state and
local income tax liabilities.
BACKUP WITHHOLDING. The Fund 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 Fund 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 Fund 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 Portfolio 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, to pay contingencies and
expenses or in anticipation of the receipt of funds from capital
contributions or the disposition of investments. To the extent that the
Portfolio borrows funds, the Fund's allocable share of income attributable
to such borrowing will generate unrelated business taxable income ("UBTI")
for federal income tax purposes for pension funds, Keogh plans, individual
retirement accounts, tax-exempt institutions and other tax-exempt investors
(and may have other adverse tax consequences for certain tax exempt
investors, e.g., the receipt of any UBTI by a charitable remainder trust
would cause all income from all sources to be taxable to such a trust).
Accordingly, such prospective investors are urged to consult their own tax
advisers concerning possible federal, state, local and non-U.S. tax
consequences from an investment in the Fund.
CERTAIN CONSIDERATIONS FOR NON-U.S. INVESTORS. The
discussion under this heading applies to certain members who are
not "U.S. persons" as determined for U.S. federal income tax
purposes ("non-U.S. members"). The term "U.S. person" means
o a citizen or individual resident of the United States;
o a corporation or partnership created or organized under the laws
of the United States or any political subdivision thereof or
therein;
o an estate the income of which is subject to U.S. federal income
taxation regardless of source; or
o a trust if (a) a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more
U.S. persons has the authority to control all substantial
decisions of the trust or (b) the trust was in existence on
August 20, 1996 and properly elected to continue to be treated as
a U.S. person.
Given the nature of the investment activities of the Fund and the
Portfolio (the activities of which would be attributed to the Fund), the
Fund believes that a non-U.S. member generally should not be subject to
regular U.S. federal income taxation on his, her or its allocable share of
Fund income where such member's nexus with the U.S. is solely as a result
of an investment in Units. No prohibition exists on the nature of
investment activities of Private Funds in which the Portfolio invests, and
thus no assurances can be given in this regard. Fund allocations of
dividends and certain interest income to non-U.S. members will be subject
to U.S. withholding tax of 30% (unless reduced or eliminated by an
applicable treaty).
If, contrary to expectations, the Portfolio and thus the
Fund, were treated as being engaged in a U.S. trade or business,
then each non-U.S. member generally would be subject to regular
U.S. federal income taxation on his, her or its allocable share of
Fund income. In such case, each non-U.S. member would be required
to file a U.S. federal income tax return reporting his, her or its
allocable share of Fund income attributable to the conduct of a
U.S. trade or business and to pay U.S. federal income tax at
regular U.S. rates on that income. In addition, the Fund would be
required to withhold and pay over to the IRS certain amounts with
respect to such income. Any amount so withheld would be creditable
against the non-U.S. member's ultimate U.S. federal income tax
liability, and the non-U.S. member would be entitled to a refund to
the extent that the amount withheld exceeded such member's U.S.
federal income tax liability for the taxable year. Finally, a
corporate non-U.S. member's allocable share of Fund income may be
subject to a 30% U.S. branch profits tax.
Different rules from those described above apply in the case
of non-U.S. members subject to special treatment under U.S. federal
income tax law, including a non-U.S. member:
o who has an office or fixed place of business in the U.S. or is
otherwise carrying on a U.S. trade or business;
o who is an individual present in the U.S. for 183 or more days or
has a "tax home" in the U.S. for U.S. federal income tax
purposes;
o who is a former citizen or resident of the U.S.; or
o that is a controlled foreign corporation, a foreign insurance
company that holds Units in connection with a U.S. trade or
business, a foreign personal holding company or a corporation
that accumulates earnings to avoid U.S. federal income tax.
NON-U.S. MEMBERS ARE URGED TO CONSULT THEIR U.S. TAX ADVISERS
REGARDING THE TAX CONSEQUENCES OF INVESTING IN THE FUND.
STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES. In addition to the
federal income tax consequences described above, the members, the Fund, the
Portfolio and the entities in which the Portfolio 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 Fund and Portfolio tax items may differ from the treatment of such items
for federal income tax purposes.
The Fund's Adviser 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 Fund's Adviser 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 Fund. Each
member will be required 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 Fund 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 Fund out of any distributions subsequently made
to the relevant members. Such advances may be funded by the Fund's Adviser
or an affiliate thereof (with interest thereon). Both the deduction for
interest payable by the Fund to the Fund's Adviser (or an affiliate
thereof) with respect to such advances, and the corresponding income from
interest received by the Fund from 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. The Portfolio's Investment Adviser has similar
discretion to file composite, group or similar state, local and non-U.S.
tax returns on behalf of its members.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISERS WITH
RESPECT TO THE STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES OF ACQUIRING,
HOLDING AND DISPOSING OF UNITS.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA) that are subject to Title I of
ERISA, (b) plans (as defined in Section 4975(e)(1) of the Code) that are
subject to Section 4975 of the Code, including individual retirement
accounts or Keogh plans, (c) any entities whose underlying assets include
plan assets by reason of a plan's investment in such entities (each of (a),
(b) and (c), a "Plan") and (d) persons who have certain specified
relationships to Plans ("Parties in Interest" under ERISA and "Disqualified
Persons" under the Code). 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 such insurance
company might be treated as a Party in Interest 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, and ERISA and Section 4975 of
the Code prohibit certain transactions between a Plan and Parties in
Interest or Disqualified Persons with respect to such Plan. Violations of
these rules may result in the imposition of excise taxes and other
penalties and liabilities under ERISA and the Code.
Prior to making an investment in the Units, prospective Plan
investors should consult with their legal advisers concerning the impact of
ERISA and the Code and the potential consequences of such investment with
respect to their specific circumstances. Moreover, each Plan fiduciary
should take into account, among other considerations, whether the fiduciary
has the authority to make the investment; whether the investment
constitutes a direct or indirect transaction with a Party in Interest or
Disqualified Person; the composition of the Plan's portfolio with respect
to diversification by type of asset; the Plan's funding objectives; the tax
effects of the investment; and 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. Governmental plans, foreign pension plans and certain church
plans are not generally subject to the fiduciary responsibility provisions
of ERISA or the provisions of Section 4975 of the Code.
The sale of any Units to a Plan is in no respect a representation by
the Fund that such an investment meets all relevant legal requirements with
respect to investments by Plans generally or any particular Plan, or that
such an investment is appropriate for Plans generally or any particular
Plan.
DESCRIPTION OF UNITS
The Fund 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 and members. A copy of the form of Operating
Agreement is attached hereto as Appendix B. Investors will become members
of the Fund, which will establish a capital account for each member. Your
capital contribution 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. See "Capital Accounts, Allocations and Distributions." The fiscal
year of the Fund ends on October 31.
SUMMARY OF LIMITED LIABILITY COMPANY OPERATING AGREEMENT
The Operating Agreement governs the relationships, rights and
obligations of the investors in the Fund. The following is intended only as
a summary of certain provisions of the Operating Agreement not discussed
elsewhere in this prospectus. The Operating Agreement is subject to the
provisions of the Investment Company Act. 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 Fund 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
Fund beyond the amount of the investor's subscription. See "Liability of
Members" below.
Voting Rights of Investors. Investors cannot participate in the
management or control of the Fund. However, the Operating Agreement
provides that, subject to certain conditions described below, the investors
may vote on or approve certain Fund matters. Upon notification to the Fund,
investors may 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 in the Fund.
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) to the extent required by the Investment Company
Act, 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 who are not parties to such contract or "interested
persons" of any such party as such term is defined in the Investment
Company Act; (iii) to the extent required by the Investment Company Act,
ratify or reject the appointment of the independent accountants of the
Fund; (iv) to the extent required by the Investment Company Act, terminate
the Fund's independent accountants (v) to the extent required by the
Investment Company Act, consent to the dissolution of the Fund; (vi) select
a liquidator in certain limited circumstances; (vii) approve certain
limited amendments to the Operating Agreement; and (viii) approve any other
matters related to the business of the Fund that the Investment Company Act
requires to be approved by the investors so long as the Fund is 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.
Whenever the Fund as an investor in the Portfolio is requested to
vote on matters pertaining to the Portfolio, the Fund will hold a meeting
of Fund Members and will vote its interest in the Portfolio for or against
such matters proportionately to the instructions to vote for or against
such matters received from the Unitholders. The Fund shall vote Units for
which it receives no voting instructions in the same proportion as the
Units for which it receives voting instructions. Other investors in the
Portfolio may alone or collectively acquire sufficient voting interests in
the Portfolio to control matters relating to the operation of the
Portfolio.
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
Fund (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 Fund without the
consent of the Fund, which consent may be withheld in its sole and absolute
discretion. No member will have the right to require the Fund to redeem
his, her or its Units. In addition, neither the Fund nor the Funds'
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,
redemption rights or sinking fund and Units are not convertible into any
other security of the Fund.
The Portfolio's operating agreement contains substantially equivalent
provisions.
OUTSTANDING SECURITIES AS OF _________, 2000
<TABLE>
<CAPTION>
(3) (4)
AMOUNT HELD BY AMOUNT OUTSTANDING
(1) (2) REGISTRANT EXCLUSIVE OF AMOUNT
TITLE OF CLASS AMOUNT AUTHORIZED OR FOR ITS ACCOUNT SHOWN UNDER (3)
-------------- ----------------- ------------------ ---------------------
<S> <C> <C> <C>
Units of Membership Interest Unlimited 0 --
</TABLE>
LIABILITY OF MEMBERS
You will not be liable for any obligations of the Fund in excess of
your capital account balance, plus your share of undistributed profits. If,
however, you receive a distribution from the Fund and after such
distribution the liabilities of the Fund exceed the fair value of the
Fund'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 Fund.
The Fund has no intention of making such a distribution. You will not have
the right to a return of your capital contribution except in accordance
with the distribution provisions of the Operating Agreement.
The Portfolio's operating agreement contains substantially equivalent
provisions.
DUTY OF CARE
The Operating Agreement provides that the members of the Board of
Managers shall not be personally liable to the Fund for the debts,
obligations or liabilities of the Fund; obligated to cure any deficit in
any capital account; required to return all or any portion of any capital
contribution; or required to lend any funds to the Fund. The Operating
Agreement also provides that no member of the Board of Managers,
appropriate officer, member, investment adviser, distributor or selling
agent of or for the Units of the Fund, or any of their respective
affiliates, shareholders, partners, officers, directors, members,
employees, agents and representatives shall have any liability,
responsibility, or accountability in damages or otherwise to any member or
the Fund for any action or inaction on the part of the Fund or otherwise in
connection with the business or affairs of the Fund or any Portfolio
Company. The Operating Agreement contains provision for the
indemnification, to the extent permitted by law, of the Board of Managers,
appropriate officers, members, investment advisers, distributor or selling
agent and any of their respective affiliates, shareholders, partners,
officers, directors, members, employees, agents and representatives by the
Fund, 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 Fund.
The rights of indemnification and exculpation provided under the Operating
Agreement do not provide for indemnification against any liability to which
the indemnified person would otherwise be subject to as a result of their
willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties under the Operating Agreement.
The Portfolio's operating agreement contains substantially equivalent
provisions.
AMENDMENT OF THE OPERATING AGREEMENT
Subject to the requirements of the Investment Company Act, the Board of
Managers may adopt amendments without a vote of the members provided such
amendments do not impair the limited liability of the members, adversely
affect the tax status of the Fund as a partnership or increase the amounts
distributed to the investment adviser while decreasing the amounts
distributed to other members.
Amendments to the Operating Agreement may be proposed by any manager,
the Fund's Adviser or by members owning in the aggregate, at least 10% of
the outstanding Units. The person or persons proposing such amendments must
submit to the Board of Managers (i) the text of the amendment, (ii) the
purpose of the amendment, and in the case of proposals by members, (iii) an
opinion of counsel reasonably acceptable to the Board of Managers that the
proposed amendment is permitted by the Investment Company Act, the Delaware
Limited Liability Company Act, applicable state and federal laws, and that
the proposed amendment will not impair the limited liability of the members
or adversely affect the classification of the Fund as a partnership for
federal income tax purposes.
To the extent required by the Investment Company Act, the Board of
Managers shall submit all proposals validly presented to the Board of
Managers to the members for a vote. Proposals approved by the Board of
Managers will be adopted with the affirmative vote of a majority of the
members, proposals which do not have the approval of the Board of Managers
require the vote of more than 67% of the members for adoption.
The Portfolio's operating agreement contains substantially equivalent
provisions.
POWER OF ATTORNEY
By purchasing an interest in the Fund, each member will appoint each
member of the Board of Managers and appropriate officers of the Fund his or
her attorney-in-fact for purposes of filing required certificates and
documents relating to the formation and continuation of the Fund as a
limited liability company under Delaware law or signing instruments
effecting authorized changes in the Fund or the Operating Agreement or
conveyances and other instruments deemed necessary to effect the
dissolution or termination of the Fund.
The power-of-attorney is a special power-of-attorney coupled with an
interest 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.
The Portfolio's operating agreement contains substantially equivalent
provisions.
TERM, DISSOLUTION AND LIQUIDATION
The Fund will be dissolved:
o on the final distribution of its assets as provided in the
Operating Agreement;
o upon election by the Board of Managers and subject, to the extent
required by the Investment Company Act, to the consent of the
members;
o upon voluntary bankruptcy, liquidation or other dissolution of
the Fund;
o on the sale or other disposition at any one time of all or
substantially all of the assets of the Fund; or
o as required by operation of law.
Upon the occurrence of any event of dissolution, the Fund's Adviser,
or a liquidator appointed by the Board of Managers, will be charged with
winding up the affairs of the Fund 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 "Capital Accounts, Allocations and Distributions."
Upon the dissolution of the Fund, its assets are to be distributed (1)
first to satisfy the debts, liabilities and obligations of the Fund, other
than debts to members including actual or anticipated liquidation expenses,
(2) next to satisfy debts owing to members and (3) finally to members
proportionately in accordance with the balances in their respective capital
accounts. Assets may be distributed in kind on a pro rata basis if the
Fund's Adviser or a liquidator determines that such a distribution would be
in the interests of the members in facilitating an orderly liquidation.
The Portfolio 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 any later date with the
approval of members holding at least two-thirds of the total
number of votes eligible to be cast;
o upon election by the Board of Managers and subject, to the extent
required by the Investment Company Act, to the consent of the
members;
o upon the voluntary bankruptcy, liquidation or other dissolution
of the Portfolio;
o on the sale or other disposition at any one time of all or
substantially all of the assets of the Portfolio; or
o as required by operation of law.
Upon the occurrence of any event of dissolution, the Investment
Adviser, or a liquidator appointed by the Board of Managers, will be
charged with winding up the affairs of the Portfolio 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 "Capital Accounts, Allocations and
Distributions."
Upon the dissolution of the Portfolio, its assets are to be
distributed (1) first to satisfy the debts, liabilities and obligations of
the Portfolio, 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 Investment Adviser proportionately in accordance
with the balances in their respective capital accounts. Assets may be
distributed in kind on a pro rata basis if the Investment Adviser or
liquidator determines that such a distribution would be in the interests of
the members in facilitating an orderly liquidation.
SELLING ARRANGEMENTS
DISTRIBUTOR
Units are offered for sale by Charles Schwab & Co., Inc. (the
"Distributor"), a registered broker-dealer and the Fund and the Portfolio's
distributor. Charles Schwab & Co., Inc. is a member of the Securities
Investor Protector Corporation and New York Stock Exchange. The Distributor
is an indirect, wholly owned subsidiary of The Charles Schwab Corporation,
the parent company of U.S. Trust Corporation and an affiliate of the
Investment Adviser and Investment Sub-Adviser. The Distributor has entered
into a Distribution Agreement with the Fund pursuant to which the
Distributor has agreed to act as the principal distributor for the Units.
This agreement is an agency agreement only and places the Distributor under
no obligation to use its best efforts to sell the Units or otherwise
solicit or promote transactions in such Units. The Distributor will not at
any time purchase any Units for its own account and its sole function is to
promote the sale of the Units. The Distributor is located at 101 Montgomery
Street, San Francisco, California 94101.
The Fund's Adviser or an affiliate will pay the Distributor from its
own assets an amount equal to 0.02% of the total of all subscriptions
received in this offering. Pursuant to the Distribution Agreement, the
Distributor may enter into agreements with one or more financial
intermediaries ("Selling Agents") relating to the purchase of Units through
such Selling Agents acting as brokers or agents for their customers. To the
extent that the Distributor introduces investors to the Fund, the Fund's
Adviser or an affiliate will pay the Distributor an on-going fee for the
sale of Units and the provision of ongoing investor services in an amount
equal to the annual rate through the fifth anniversary of the final
subscription closing date of 0.45% of the average quarterly net asset value
of all outstanding Units held by investors introduced to the Fund by the
Distributor and at the annual rate of 0.22% thereafter, subject to
elimination upon all such fees totaling 6.5% of the gross proceeds received
by the Fund from this offering.
The Fund has agreed to indemnify the Distributor and each Selling
Agent who enters into a selling agent agreement 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
principal underwriter against any liability to the Fund or its security
holders to which such principal underwriter would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the
performance of its duties, or by reason of its 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
Fund by Skadden, Arps, Slate, Meagher & Flom LLP, Boston, Massachusetts.
INDEPENDENT AUDITORS
The Statement of Assets and Liabilities of the Fund and the Portfolio
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 Fund and the Portfolio are required to file reports with the
Securities and Exchange Commission. Information about the Fund and the
Portfolio can be reviewed and copied at the Securities and Exchange
Commission'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 Securities and Exchange Commission'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. You may obtain a prospectus and statement of
additional information relating to the Portfolio by contacting the Fund or
the Portfolio at 212-852-3125.
Investors should rely only on the information contained in this
prospectus. Neither the Fund nor the Distributor has 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.
Neither the Fund nor the Distributor, nor any selling agent, is, 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 Fund's business, financial condition, results of
operations and prospectus may have changed since that date.
REPORTS TO MEMBERS
The Fund 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. Neither the Fund nor the
Portfolio intends to hold annual meetings of their Unitholders.
FINANCIAL STATEMENTS
The following comprise the financial statements of the Fund:
o Report of Independent Auditors;
o Statement of Assets and Liabilities; and
o Notes to Financial Statements.
The following comprise the financial statements of the Portfolio:
o Report of Independent Auditors
o Statement of Assets and Liabilities; and
o Notes to Financial Statements.
REPORT OF INDEPENDENT AUDITORS
To the Members and Board of Directors
Excelsior Venture Investors III, LLC
We have audited the accompanying statement of assets and liabilities of
Excelsior Venture Investors III, LLC (the "Fund") as of October __, 2000.
This financial statement is the responsibility of the Fund's management.
Our responsibility is to express an opinion on this financial statement
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Excelsior Venture
Investors III, LLC at October __, 2000, in conformity with accounting
principles generally accepted in the United States.
New York, New York
October __, 2000
[Fund Financial Statements to come]
REPORT OF INDEPENDENT AUDITORS
To the Members and Board of Directors
Excelsior Venture Partners III, LLC
We have audited the accompanying statement of assets and liabilities of
Excelsior Venture Partners III, LLC (the "Fund") as of July 28, 2000. This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Excelsior Venture
Partners III, LLC at July 28, 2000, in conformity with accounting
principles generally accepted in the United States.
New York, New York
July 31, 2000
--------------------------------------------------------------------------
Excelsior Venture Partners III, LLC
Statement of Assets and Liabilities
--------------------------------------------------------------------------
--------------------------------------------------------------------------
July 28, 2000
--------------------------------------------------------------------------
ASSETS:
Cash....................................................... $ 500
Deferred offering costs.................................... 1,356,200
--------------------------------------------------------------------------
TOTAL ASSETS......................................... 1,356,700
------------
--------------------------------------------------------------------------
LIABILITIES:
Offering costs payable..................................... 1,356,200
------------
--------------------------------------------------------------------------
TOTAL LIABILITIES.................................... 1,356,200
------------
--------------------------------------------------------------------------
NET ASSETS.................................................. $ 500
============
MEMBERSHIP INTERESTSOUTSTANDING............................. 1
============
NET ASSET VALUE PER UNIT ................................... $ 500
------------
==========================================================================
NET ASSETS CONSISTED OF THE FOLLOWING AT JULY 28, 2000:
Paid-in capital ......................................... $ 500
------------
NET ASSETS ......................................... $ 500
============
==========================================================================
Notes to Financial Statements are an integral part of this Statement.
EXCELSIOR VENTURE PARTNERS III, LLC
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
Excelsior Venture Partners III, LLC (the "Company") is a
non-diversified, closed-end management investment company which has
elected to be treated as a business development company under the
Investment Company Act, and which has registered its securities for
sale under the Securities Act of 1933. The Company was established as
a Delaware limited liability company on February 18, 2000 and
maintains a fiscal year end of October 31. The Company is authorized
to offer an unlimited number of units of membership interests
("units") with no par value. The minimum subscription is $100,000.
Certain costs incurred and to be incurred in connection with the
initial offering of shares of the Company are estimated at
$1,356,200. Each member's share of these costs will be deducted from
his or her capital contribution on or shortly after the final
subscription closing. The Company has no operations to date, other
than the sale to David Fann, President and Co-CEO of the Company, of
one unit on July 7, 2000.
NOTE 2 - OFFERING COSTS
The Company estimates incurring offering expenses of $1,356,200,
comprised of $1,025,000 for legal and consulting, $30,000 for
printing, $50,000 for advertising and marketing, $231,200 in
registration, and $20,000 in other offering costs.
NOTE 3 - CONTINGENT LIABILITIES
The Company has entered into an agreement with Charles Schwab & Co.,
Inc. ("Schwab" or the "Distributor") whereby Schwab will pay the
organization expenses of the Company if the Company receives less
than $300,000,000 in subscriptions from its initial public offering
of units. In the event the Company does receive subscriptions
totaling $300,000,000 or more, the Company will pay its own
organization expenses, and each member's share of these costs will be
deducted from his or her initial capital contribution on or shortly
after the final subscription closing. The Company estimates
organization expenses to be $50,000, comprised of $10,000 for audit
fees and $40,000 for legal and consulting fees.
NOTE 4 - AGREEMENTS
In return for its services and expenses which the Investment Adviser
assumes under the Investment Advisory Agreement, the Company will pay
the Investment Adviser, on a quarterly basis, a management fee at an
annual rate equal to 2.00% of the Company's average quarterly net
assets through the fifth anniversary of the final closing date and
1.00% of net assets thereafter. In addition to the management fee,
the Investment Adviser is 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
cumulative realized and unrealized losses on all investments of any
type. The Incentive Carried Interest will be determined annually as
of the end of each calendar year.
Pursuant to an Administrative, Accounting and Investor Services
Agreement, the Company retains PFPC Inc. ("PFPC"), an indirect
wholly-owned subsidiary of PNC Bank N.A., as Administrator. In
addition, PFPC Trust Company serves as the Fund's custodian, and PFPC
serves as transfer agent.
The Investment Adviser or an affiliate will pay the Distributor from
its own assets an amount equal to 0.02% of the total of all
subscriptions received in this offering. Pursuant to the Distribution
Agreement, the Distributor may enter into agreements with one or more
financial intermediaries ("Selling Agents") relating to the purchase
of units through such Selling Agents acting as brokers or agents for
their customers. The Investment Adviser or an affiliate will pay the
Distributor an on-going fee for the sale of units and the provision
of ongoing investor services in an amount equal to the annual rate of
0.45% of the average quarterly net asset value of all outstanding
units held by investors introduced to the Company by the Distributor
through the fifth anniversary of the final subscription closing date
and at the annual rate of 0.22% thereafter, subject to elimination
upon all such fees totaling 6.5% of the gross proceeds received by
the Company from this offering.
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Page
Investment
Restrictions.................................................B-2
Until ninety 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.
B-2
APPENDIX A
RESIDENTS OF THE FOLLOWING STATES MUST MEET THE
SUITABILITY STANDARDS AS SET FORTH BELOW
ARIZONA
Arizona residents must represent in writing that their investment in
Units of the Fund does not represent more than ten percent of their net
worth less the value of their investments in limited partnership interests
and must have one of the following: (a) an annual gross income of at least
$75,000 and a net worth of at least $75,000 exclusive of home, car and home
furnishings; (b) a net worth of at least $225,000 exclusive of home, car
and home furnishings; or (c) in the case of sales to qualified pension or
profit sharing plans or trusts, Keogh plans or individual retirement
accounts, that the net worth and income requirements set forth in items (a)
or (b) of this paragraph are met by the fiduciary account or by the donor
who directly or indirectly supplies the monies for the purchase of the
securities.
MINNESOTA
To invest in Units of the Fund, Minnesota residents must qualify as
an accredited investor as that term is defined pursuant to Rule 501 of the
Securities Act of 1933, as amended.
NEBRASKA
To invest in Units of the Fund, Nebraska residents must meet one of
the following: (a) individual annual taxable income of at least $200,000 in
each of the two most recent years or joint income with spouse in excess of
$300,000 in each of the two most recent years and a reasonable expectation
of reaching the same income level in the current year; or (b) individual or
joint net worth with spouse of at least $1,000,000.
NEW HAMPSHIRE
To invest in Units of the Fund , New Hampshire residents must meet
one of the following: (a) annual taxable income of at least $50,000 and a
net worth exclusive of home, car and home furnishings of at least $125,000;
or (b) a net worth exclusive of home, car and home furnishings of at least
$250,000.
OKLAHOMA
To invest in Units of the Fund, Oklahoma residents must qualify as an
accredited investor as that term is defined pursuant to Rule 501 of the
Securities Act of 1933, as amended.
TEXAS
To invest in Units of the Fund, Texas residents must qualify as an
accredited investor as that term is defined pursuant to Rule 501 of the
Securities Act of 1933, as amended.
WEST VIRGINIA
To invest in Units of the Fund, West Virginia residents must meet one
of the following: (a) individual annual taxable income of at least $200,000
in each of the two most recent years or joint income with spouse in excess
of $300,000 in each of the two most recent years and a reasonable
expectation of reaching the same income level in the current year; or (b)
individual or joint net worth with spouse of at least $1,000,000.
The information in this statement of additional information is not complete
and may be changed. No person may sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This statement of additional information 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.
SUBJECT TO COMPLETION, DATED OCTOBER 11, 2000
EXCELSIOR VENTURE INVESTORS III, LLC
STATEMENT OF ADDITIONAL INFORMATION
Excelsior Venture Investors III, LLC (the "Fund") is a newly
organized, closed-end, non-diversified investment management company. This
statement of additional information relating to units of membership
interest of the Fund does not constitute a prospectus, but should be read
in conjunction with the prospectus relating hereto dated October __, 2000.
This statement of additional information does not include all information
that a prospective investor should consider before purchasing units, and
investors should obtain and read the prospectus prior to purchasing such
units. A free copy of the prospectus may be obtained by calling the Fund at
(212) 852-3125. You may also obtain a copy of the prospectus on the
Securities and Exchange Commission's web site (http://www.sec.gov).
Capitalized terms used but not defined in this statement of additional
information have the meanings ascribed to them in the prospectus.
TABLE OF CONTENTS
Page
Investment
Restrictions.................................................B-2
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Units:
(1) invest 25% or more of the value of its total assets in any
one industry;
(2) issue senior securities or borrow money other than as
permitted by the Investment Company Act;
(3) make loans of money or property to any person, except
through loans of portfolio securities, the purchase of fixed
income securities consistent with the Fund's investment
objective and policies or the entry into repurchase
agreements;
(4) underwrite the securities of other issuers, except to the
extent that in connection with the disposition of portfolio
securities or the sale of its own securities the Fund may be
deemed to be an underwriter;
(5) purchase or sell real estate or interests therein provided
that the Fund may hold and sell any real estate acquired in
connection with its investment in portfolio securities; or
(6) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by
applicable law without the Fund becoming subject to
registration with the Commodities Futures Trading Commission
as a commodity pool.
"Majority of the outstanding" means (i) 67% or more of the Units
present at a meeting, if the holders of more than 50% of the outstanding
Units are present or represented by proxy, or (ii) more than 50% of the
outstanding Units, whichever is less.
In addition to the foregoing fundamental investment policies, the
Fund is also subject to the following non-fundamental restrictions and
policies, which may be changed by the Mangers. The Fund may not:
(1) Make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, giving
effect to such sale, the market value of all securities sold
short does not exceed 25% of the value of the Fund's total
assets and the Fund's aggregate short sales of a particular
class of securities does not exceed 25% of the then
outstanding securities of that class. The Fund may also make
short sales "against the box" without respect to such
limitations. In this type of short sale, at the time of the
sale, the Fund owns or has the immediate and unconditional
right to acquire at no additional cost the identical
security.
(2) Purchase securities of open-end or closed-end investment
companies
Notwithstanding any of the foregoing investment restrictions, the
Fund may invest without limitation in Portfolio Units.
PART C - OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
1. Part A: Financial Statements of the Fund
Report of Independent Auditors.
Statement of Assets and Liabilities.
Notes to Financial Statements
Financial Statements of the Portfolio
Report of Independent Auditors
Statement of Assets and Liabilities
Notes to Financial Statements
Part B: Not applicable.
2. Exhibits
(a) (1) Certificate of Formation of Limited Liability Company
filed June 1, 2000.*
(2) Certificate of Amendment filed August 30, 2000.**
(3) Limited Liability Company Operating Agreement.***
(b) Not applicable.
(c) Not applicable.
(d) Specimen Certificate of the Fund's Units, the
rights of holders of which are defined in
Exhibit(a)(3).***
(e) Not applicable.
(f) Not applicable.
(g) Form of Investment Advisory Agreement between the
Fund and U.S. Trust Company.
(h) (1) Form of Distribution Agreement between the
Fund and Charles Schwab & Co., Inc.***
(2) Form of Selling Agent Agreement among
Charles Schwab & Co., Inc., the Fund and
the selling agents.***
(i) Not applicable.
(j) Form of Custodian Agreement between the
Fund and PFPC Trust Company.***
(2) Form of Administration, Accounting and
Investor Services Agreement between the
Fund and PFPC, Inc.***
(3) Form of Escrow Agreement between the Fund
and PFPC, Inc.***
(k) Not applicable.
(l) Opinion and consent of Skadden, Arps, Slate,
Meagher and Flom LLP.***
(m) Not applicable
(1) Form of opinion and consent of Skadden, Arps,
Slate, Meagher and Flom LLP as to certain tax
matters.***
(2) Agreement with respect to Seed Capital.***
(n) Consent of Ernst & Young, LLP independent auditors.***
(o) Not applicable.
(p) (1) Form of Subscription Agreement for investment in
Units of the Fund.***
(q) Not applicable.
(r) (1) Code of Ethics of the Fund.***
(2) Code of Ethics of U.S. Trust Company,
United States Trust Company of New York and the
selling agents.***
(3) Code of Ethics of the Distributor.***
(s) (1) Power of Attorney*
(2) Power of Attorney**
*Incorporated by reference to the Fund's registration statement on Form N-2
(File No. 333-38550), filed on June 5, 2000.
**Incorporated by reference to the Fund's amended registration statement on
Form N-2 (File No. 333-38550), filed on September 20, 2000.
***To be filed by amendment.
Item 25. MARKETING ARRANGEMENTS
See the Form of Distribution Agreement and Form of Selling Agent
Agreement to be filed as Exhibits 2(h)(1) and (2) as well as the Fund'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
Fund, in connection with the issuance and distribution of the securities
covered by this registration statement.
Securities and Exchange Commission fees [$13,200]
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 Fund's shares, it is
anticipated that no person will be controlled by or under common control
with the Fund.
Item 28. NUMBER OF HOLDERS OF SECURITIES AS OF OCTOBER ___, 2000
Title of Class Number of Record Holders
-------------- ------------------------
Units of Membership Interest, without par value [ ]
Item 29. INDEMNIFICATION
The Fund's Investment Advisory Agreement provides for indemnification
by the Fund of the Fund's 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 Fund's Adviser of its duties
thereunder or the reckless disregard of its obligations and duties under
the Fund's Investment Advisory Agreement.
By subscribing for Units, each member agrees to indemnify and hold
harmless the Fund, the Fund's Adviser, the members of the Board of
Managers, each appropriate officer and each other member and any successor
or assign of any of the foregoing, from and 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. A similar
indemnification is required to be made by a permitted transferee. The
Operating Agreement provides that the members of the Board of Managers
shall not be personally liable to the Fund for the debts, obligations or
liabilities of the Fund; obligated to cure any deficit in any capital
account; required to return all or any portion of any capital contribution;
or required to lend any funds to the Fund. The Operating Agreement also
provides that no member of the Board of Managers, appropriate officer,
member, investment adviser, distributor or selling agent of or for the
Units of the Fund, or any of their respective affiliates, shareholders,
partners, officers, directors, members, employees, agents and
representatives shall have any liability, responsibility, or accountability
in damages or otherwise to any member or the Fund for any action or
inaction on the part of the Fund or otherwise in connection with the
business or affairs of the Fund or any Portfolio Company. The Operating
Agreement contains provision for the indemnification, to the extent
permitted by law, of the Board of Managers, appropriate officers, members,
investment advisers, distributor or selling agent and any of their
respective affiliates, shareholders, partners, officers, directors,
members, employees, agents and representatives by the Fund, 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 Fund. The rights of
indemnification and exculpation provided under the Operating Agreement do
not provide for indemnification to which the indemnified person would
otherwise be subject to as a result of their willful misfeasance, bad
faith, gross negligence or reckless disregard of their duties under the
Operating Agreement.
Pursuant to the Distribution Agreement and the Selling Agent
Agreement, the Fund agrees to indemnify the Distributor and Selling Agent
against certain civil liabilities, including liabilities under the federal
securities laws.
Item 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER.
U.S. Trust Company, the Fund's Investment Adviser, provides asset
management, private banking and fiduciary services. For the names and
principal businesses of the directors and certain senior executive officers
of U.S. Trust Company, including those who are engaged in any other
business, profession, vocation or employment of a substantial nature see
the Fund's prospectus under the caption "Management."
Item 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Fund will be maintained at
the office of PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware
19809.
Item 32. MANAGEMENT SERVICES
Except as described in the Prospectus under the caption "Management,"
the Fund is not a party to any management service related contract.
Item 33. UNDERTAKINGS
The Fund undertakes to suspend the offering of its common shares
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 Fund 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.
The Fund undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any statement of additional
information.
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 11th day of October, 2000.
EXCELSIOR VENTURE INVESTORS III, LLC
By: /s/ David I. Fann
--------------------------------------------------------
David I. Fann, Co-Chief Executive Officer and President
(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 the registration statement of Excelsior Venture Investors III, LLC 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 Co-Chief Executive Officer and President October 11, 2000
-------------------------- (principal executive officer)
David I. Fann
/s/ Douglas A. Lindgren* Co-Chief Executive Officer and October 11, 2000
--------------------------- Chief Investment Officer
Douglas A. Lindgren (principal executive officer)
/s/ Brian F. Schmidt* Chief Financial Officer October 11, 2000
--------------------------- (principal financial and
Brian F. Schmidt accounting officer)
/s/ John C. Hover* Manager October 11, 2000
--------------------------
John C. Hover II
/s/ Gene M. Bernstein* Manager October 11, 2000
--------------------------
Gene M. Bernstein
/s/ Steven V. Murphy* Manager October 11, 2000
--------------------------
Steven V. Murphy
/s/ Victor F. Imbimbo, Jr.* Manager October 11, 2000
-----------------------------
Victor F. Imbimbo, Jr.
*by: /s/ David I. Fann
------------------------------------------
David I. Fann
Attorney-in-Fact
</TABLE>
SIGNATURES
Excelsior Venture Partners III, LLC has duly caused this registration
statement on Form N-2 of Excelsior Venture Investors III, LLC (File No.
333-38550) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 11th day of
October, 2000.
EXCELSIOR VENTURE INVESTORS III, LLC
By: /s/ David I. Fann
--------------------------------------------------------
David I. Fann, Co-Chief Executive Officer and President
(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 the registration statement of Excelsior Venture Investors III, LLC 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 Co-Chief Executive Officer and President October 11, 2000
-------------------------- (principal executive officer)
David I. Fann
/s/ Douglas A. Lindgren* Co-Chief Executive Officer and October 11, 2000
--------------------------- Chief Investment Officer
Douglas A. Lindgren (principal executive officer)
/s/ Brian F. Schmidt* Chief Financial Officer October 11, 2000
--------------------------- (principal financial and
Brian F. Schmidt accounting officer)
/s/ John C. Hover* Manager October 11, 2000
--------------------------
John C. Hover II
/s/ Gene M. Bernstein* Manager October 11, 2000
--------------------------
Gene M. Bernstein
/s/ Steven V. Murphy* Manager October 11, 2000
--------------------------
Steven V. Murphy
/s/ Victor F. Imbimbo, Jr.* Manager October 11, 2000
-----------------------------
Victor F. Imbimbo, Jr.
*by: /s/ David I. Fann
------------------------------------------
David I. Fann
Attorney-in-Fact
</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. 2 [X]
Post-Effective Amendment No. [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT FUND
ACT OF 1940 [X]
Amendment No. 2 [X]
EXCELSIOR VENTURE INVESTORS III, LLC
(Exact Name of Registrant as Specified in Charter)
EXHIBIT INDEX
No. Exhibit Exhibit
--- ------- -------
2. Exhibits
(a) (1) Certificate of Formation of Limited Liability Company
filed June 1, 2000.*
(2) Certificate of Amendment filed August 30, 2000.**
(3) Limited Liability Company Operating Agreement.***
(b) Not applicable.
(c) Not applicable.
(d) Specimen Certificate of the Fund's Units, the
rights of holders of which are defined in
Exhibit(a)(3).***
(e) Not applicable.
(f) Not applicable.
(g) Form of Investment Advisory Agreement between the
Fund and U.S. Trust Company.
(h) (1) Form of Distribution Agreement between the
Fund and Charles Schwab & Co., Inc.***
(2) Form of Selling Agent Agreement among
Charles Schwab & Co., Inc., the Fund and
the selling agents.***
(i) Not applicable.
(j) Form of Custodian Agreement between the
Fund and PFPC Trust Company.***
(2) Form of Administration, Accounting and
Investor Services Agreement between the
Fund and PFPC, Inc.***
(3) Form of Escrow Agreement between the Fund
and PFPC, Inc.***
(k) Not applicable.
(l) Opinion and consent of Skadden, Arps, Slate,
Meagher and Flom LLP.***
(m) Not applicable
(1) Form of opinion and consent of Skadden, Arps,
Slate, Meagher and Flom LLP as to certain tax
matters.***
(2) Agreement with respect to Seed Capital.***
(n) Consent of Ernst & Young, LLP independent auditors.***
(o) Not applicable.
(p) (1) Form of Subscription Agreement for investment in
Units of the Fund.***
(q) Not applicable.
(r) (1) Code of Ethics of the Fund.***
(2) Code of Ethics of U.S. Trust Company,
United States Trust Company of New York and the
selling agents.***
(3) Code of Ethics of the Distributor.***
(s) (1) Power of Attorney*
(2) Power of Attorney**
* Incorporated by reference.
** To be filed by amendment.
