<PAGE>
-----------------------------------
UST
PRIVATE EQUITY
INVESTORS FUND, INC.
-----------------------------------
ANNUAL REPORT
October 31, 1997
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
To Our Shareholders:
We are pleased to inform you that UST Private Equity Investors Fund, Inc. (the
"Fund") has completed the construction of its private equity investment
portfolio. The Fund's investment objective is to achieve long-term capital
appreciation through investment in later-stage venture capital situations and
private middle market companies and by investing in certain private equity
funds managed by third parties. We believe we have created the foundation of an
investment portfolio that will service us well in achieving this objective.
In 1997, the Fund made investments in eight private companies. Since its
inception, the Fund has invested $26.6 million in 12 private companies (two of
which are now public). In addition, the Fund has committed $12.0 million, $5.3
million of which has been drawn, in six private equity investment funds. This
is consistent with our strategy of investing 70% of our assets in direct
investments and 30% of our assets in private funds.
To date, the Fund has paid out dividends totaling $2.2 million. In 1997, the
Fund realized net capital gains of $2.0 million which will be our capital gains
dividend distribution to be paid in December 1997.
Direct Investments
We continue to believe that many of the private companies in which we have
invested are dominant or emerging leaders within their respective business
niches. These investments are summarized below.
o AbTox, Inc., Mundelein, IL, manufactures gas plasma sterilizers used in
hospitals. The use of minimally invasive surgical tools (e.g., lapryscopes
and endoscopes) has become widespread requiring more advanced sterilization
methods. AbTox's management believes that the Company's sterilizers are
safer and more efficient than the alternatives. The sterilizers are FDA
approved and the Company has a strong intellectual property position. The
Fund led the financing which was completed in February 1997. It also
currently holds a position on the Company's Board of Directors. Other
investors include Hambrecht & Quist, Montgomery Medical Ventures, New York
Life, CitiGrowth Funds and Doughery and Wilder.
o Best Friends Pet Care Inc., Norwalk, CT, is an innovative pet boarding and
grooming provider which has been featured in The Wall Street Journal, U.S.
News and World Report, and The New York Times among other periodicals. The
Company has located its kennels to allow for easier consumer access while
providing higher quality pet care than the typical kennel. Best Friends is
currently building several new facilities throughout the Northeast modeled
after its Norwalk, CT center. Other investors include Consumer Venture
Partners, Phillips-Smith, Lawrence Smith & Horey, Tudor Investments and Eos
Partners.
o Cardiopulmonary Corp., Milford, CT, is a manufacturer of "smart" ventilators
which gauge the respiratory strength of an acute or sub-acute patient. The
Company's ventilators are designed to allow patients to breathe more easily
and be weaned more quickly. These advantages should lead to better clinical
results and substantial healthcare cost savings. The technology was
developed at Yale University Hospital - New Haven and is FDA approved. The
Company began shipping product in 1997 and we expect that it will experience
significant revenue growth in 1998. Other venture investors include Oxford
Bioscience, Grace Horn Ventures, Aetna, and Axiom Ventures.
o CommSite International, Inc., Vienna, VA, is a wireless communications
antennae site location, site acquisition, and site management services
company. CommSite has contracts with several major carriers to build out
cellular, paging, specialized mobile radio, and personal communications
services networks. In 1997, the Company has substantially grown its customer
base and, as
<PAGE>
a consequence, its revenue. The Fund was the lead investor in the Company's
first institutional financing completed in May 1996, and continues to be
active on the Board of Directors. Other investors include Edison Ventures and
Lawrence Smith & Horey.
o Corsair Communications, Inc., Palo Alto, CA, (ticker: "CAIR", Nasdaq),
employs its radio frequency fingerprinting technology to combat cellular
telephone fraud and improve cellular networks. The Company's products have
been successfully deployed both domestically and abroad. The Fund was the
lead investor in the October 1996 private equity financing, at an adjusted
cost basis of $8.25 per share. In July 1997, the Company completed an
initial public offering priced at $15.00 per share. The closing stock price
as of the Fund's fiscal year end was $23.25 per share. We are currently
carrying this position at a 15% discount or $19.76 per share reflecting
restrictions of sale. Other investors from the Company's private financings
include Kleiner Perkins, Sevin Rosen, Accel, Technology Crossover Ventures
and Norwest Ventures.
o LogicVison, Inc., San Jose, CA, is a leading developer of built-in
semiconductor testing software. As semiconductors become more complex,
testing becomes increasingly difficult and even more critical. One approach
entails designing the chip and the testing method concurrently, and
incorporating the testing function on the chip to allow for self-testing.
LogicVision is a leader in this area having achieved key "design wins" with
several chip design companies. Other investors in the Company include
Citicorp, CitiGrowth Funds, Vertex, Zeisinger Capital and Bayview Ventures.
o NeoVista Software, Inc., Cupertino, CA, is a company engaged in developing
data mining software applications. Data mining is an emerging industry
segment resulting from the investment by companies in data warehouses. Data
mining allows companies to discover non-obvious relationships by applying
various artificial intelligence algorithms to their data warehouses.
Neovista's current customer base includes several large banks, leading
insurance companies, and national retailers. Other investors include Kleiner
Perkins, Sevin Rosen, and New York Life.
o The Party Experience, Inc./Party Stores Holdings, Inc., Melville, NY, is a
regional retail store chain (primarily New York and Massachusetts) focused
on the concept of selling party and party-related merchandise (plates,
decorations, balloons, etc.) at every day low prices. Currently, the Fund
holds a seat on the Board of Directors. Other investors include Furman Selz,
Sprout Group (a Donaldson, Lufkin, Jenrette venture affiliate), and
CitiGrowth Funds.
o P2 Holdings Corporation/Plynetics, San Leandro, CA., is a leading provider of
a broad range of integrated rapid prototyping and rapid tooling services.
Corporations have begun outsourcing these services in order to shorten
product development cycles and reduce production costs. Plynetics has grown
rapidly and established itself as a leader through organic growth and
acquisition. We currently serve on the Company's Board of Directors. Other
investors include Sienna Industries, Exeter Equity Partners, East River
Ventures and Bayview Investors.
o ProCommunications, Inc., Somerset, NJ, provides telephone answering and
inbound call services for small and medium sized businesses. The Company's
strategy is to consolidate the inbound teleservice industry while
cross-selling additional value-added services. The Fund invested in
September 1996 and currently maintains a seat on the Board of Directors.
Other investors include Bachow Associates, Edison Ventures, Fidelity
Capital, Lawrence Smith & Horey, Penn Janney and Nassau Capital (Princeton
University Endowment Fund).
o QuickLogic Corporation, San Jose, CA, is a manufacturer and developer of
programmable logic devices and field programmable gate array (FPGA)
semiconductors. QuickLogic's technology allows for more flexible design
implementation and enhanced chip performance. As a result, its products
allow companies to shorten their product development cycle and reduce
product time to market. The company is currently expanding its customer base
and growing at an attractive rate. Other investors include Morgenthaler
Ventures, US Venture Partners, Sequoia Capital, TVI, and NEA.
<PAGE>
o Rental Service Corporation, Scottsdale, AZ, (ticker: "RSV", New York Stock
Exchange ) is a consolidator of heavy equipment rental companies. Over the
past two years, the Company has achieved market leadership by undertaking a
hub/satellite acquisition and build-out strategy. In addition, the Company
uses a state-of-the art management information system to deploy equipment
and make pricing decisions. The Fund made its investment in January 1996 at
$7.03 per share. In September 1996, the Company successfully completed an
initial public offering. We sold approximately two-thirds of our position at
$19.83 per share in May 1997. The closing price at October 31, 1997 was
$26.75 per share. As of October 31, 1997, this position was carried at a 10%
discount to the closing price reflecting certain sale restrictions. Other
investors from the Company's private financings were Brentwood Associates
and Nassau Capital (Princeton University Endowment Fund).
Fund Investments:
In 1996, the Fund made commitments to six private equity funds ("Private
Funds") totaling $12.0 million. At this point, $5.3 million of this commitment
has been drawn. The investment philosophies of the Private Funds range from
those seeking to invest in start-up, high- potential businesses to those
pursuing opportunistic buyouts of mature companies. We believe each fund is
managed by experienced, value-added investors who should generate superior
returns. Although it is still early in the life of these Private Funds (most
are 10-year limited partnerships with a four to five year investment period),
we are seeing some results. For example, in 1997, we received two stock
distributions from Sevin Rosen V, LP representing some early success in their
portfolio. We have summarized the activities of Sevin Rosen V, LP and the other
Private Funds below:
o Brentwood Associates Buyout Fund II, LP ("Brentwood") . Brentwood specializes
in consolidating businesses in fragmented industries. To date, Brentwood has
invested in an Internet education company targeting the K - 12 grades; a
provider of educational promotional materials for pharmaceutical companies;
and a value based specialty movie theater and family entertainment company.
o Bruckmann, Rosser, Sherrill & Co., LP ("BRS") BRS is a leveraged buyout fund
targeting acquisitions in stable industries. BRS has effected seven
acquisitions to date and several add-on acquisitions for their portfolio
companies. These include: the California Pizza Kitchen, a specialty
restaurant chain; a manufacturer of high quality activewear; Restaurant
Associates, a provider of food services, catering and restaurant management;
and Jitney-Jungle Stores of America, Inc., a grocery retailer in the
Southeastern U.S. which has subsequently acquired Delchamps, Inc.
o Lawrence, Smith & Horey III, LP ("LSH") LSH targets later-stage and new media
investment opportunities on the East Coast. LSH is currently invested in six
companies in various industry segments including: an Internet classified
advertisement company; a switched telecommunications company providing
enhanced fax services; and a start-up of a regional airline. LSH has also
co-invested with the Fund in CommSite, ProCommunications and Best Friends.
o Morgenthaler Venture Partners IV, LP ("Morgenthaler") Morgenthaler is focused
on healthcare and information technology companies across all investment
stages. The current portfolio consists of eleven companies including:
CardioThoracic Systems, Inc. (ticker: "CTSI", NASDAQ) which completed its
initial public offering in April 1996; a buyout investment of a manufacturer
of metal conveyor belts and wire products; and a developer of
pharmaceuticals for diabetes, rheumatoid arthritis and multiple sclerosis.
One company in the portfolio has been sold - AneuRx, Inc. which was acquired
by Medtronic, a public company, at over 2.5 times Morgenthaler's cost basis.
o Sevin Rosen V, LP ("Sevin Rosen") Sevin Rosen's strategy is to invest in
early-stage technology companies on a national basis. Over the last year,
Sevin Rosen has made two distributions resulting from their successes. The
first distribution resulted from the initial public offering of Ciena
<PAGE>
(ticker: "CIEN", NASDAQ), a company whose products expand the capacity of
fiber optic lines in telecommunications applications. Ciena's initial public
offering was the largest public offering, as measured by market
capitalization, of any venture capital backed company. We received 13,228
shares with a cost basis of $1.40 per share which we sold at an average price
of $52.05. The second distribution resulted from the sale of Integrity QA, a
software company, to Pure Atria. In this case, we received 4,683 shares with a
cost basis of $1.85 per share which we sold at an average price of $13.45 per
share. To date, Sevin Rosen has made 18 other investments including: Capstone
Turbine Corp., a developer of a highly efficient, low emission small turbine
generator; and a company which is developing a proprietary spectrum management
system for analog and digital cellular networks.
o Vanguard V, LP ("Vanguard") Vanguard invests in seed and early stage
companies in the communications, life science and computer sectors. Their
current investment portfolio consists of fifteen companies including: a
company that designs and sells network server appliances tailored to the
needs of Internet and Intranet server products; a company developing a high
speed router based on parallel processing computer technology; and a company
which is using technology licensed from NASA to produce materials for
biotechnology applications.
In the two years that the Fund has been in existence, we are pleased to have
witnessed early results. Two of our investments, Rental Service Corporation and
Corsair Communications, are now public and have been trading well in the
after-market. We are also beginning to see value creation in the Private Funds
investment program. As we make the transition from the investment phase to the
harvest stage, we are positioning some of our portfolio companies to pursue
public offerings and we are encouraging others to explore merger or acquisition
opportunities. We will disclose these events to you as they unfold.
Notwithstanding our present optimism, we expect that some of our companies may
experience material adversity which could result in a partial or total loss of
a particular investment. While such an event has yet to occur, we believe this
is inevitable given the risks of private equity investing. We expect that our
disciplined investment approach will continue to create long-term capital
appreciation for our investors.
Respectfully submitted,
/s/David Fann /s/Douglas Lindgren
- ------------------------------------- ------------------------
David Fann Douglas Lindgren
President and Chief Executive Officer Executive Vice President
<PAGE>
UST Private Equity Investors Fund, Inc.
Portfolio of Investments October 31, 1997
<TABLE>
<CAPTION>
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- --------------- ------------ -----------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 9.53%
$ 500,000 Abbey National Treasury, 11/26/97 ..................... 5.50% $ 498,741
500,000 Chevron Transport Corp., 11/14/97 ..................... 5.52 500,000
500,000 CIT Group Holdings, Inc., 11/25/97 ..................... 5.47 500,000
500,000 Ford Motor Credit Corp., 11/20/97 ..................... 5.48 500,000
500,000 General Electric Capital Corp., 11/13/97 ............... 5.41 500,000
500,000 General Electric Capital Corp., 11/17/97 ............... 5.50 500,000
500,000 Goldman Sachs & Co., 11/13/97 ........................ 5.53 499,053
500,000 IBM Credit Corp., 11/20/97 ........................... 5.48 500,000
500,000 Sears & Roebuck Acceptance, 12/12/97 .................. 5.52 500,000
----------
TOTAL COMMERCIAL PAPER (Cost $4,497,794) ............... 4,497,794
----------
CORPORATE BONDS - 4.21%
225,000 Bell Atlantic Corp., 12/15/97 ........................ 6.25 225,131
500,000 Chubb Capital Corp., 2/01/98 ........................... 6.00 500,665
100,000 Dupont, 12/01/97 ....................................... 8.65 100,229
485,000 Heinz (H.J.) Co., 1/05/98 .............................. 8.00 487,250
100,000 Philip Morris, 1/15/98 ................................. 6.38 100,082
431,000 Revlon Worldwide, Series B, Zero Coupon, 3/15/98 ...... 422,380
150,000 Southwestern Bell Capital, 1/20/98 ..................... 6.45 150,264
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TOTAL CORPORATE BONDS (Cost $1,984,155) ............... 1,986,001
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U.S. GOVERNMENT AGENCY OBLIGATIONS - 8.58%
550,000 Federal Farm Credit Bank, 11/03/97 ..................... 5.50 549,996
2,000,000 Federal Home Loan Bank, 11/07/97 ..................... 5.56 1,999,957
500,000 Federal National Mortgage Association, 12/09/97 ...... 5.38 499,840
1,000,000 Student Loan Mortgage Association, 12/24/97 ............ 5.62 999,691
----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost $4,049,484) .................................... 4,049,484
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PRIVATE INVESTMENT FUNDS #, @ - 11.26%
933 Brentwood Associates Buyout Fund II, LP ............... 707,605
1,380 Bruckmann, Rosser, Sherrill & Co., LP .................. 559,575
6,003 Lawrence, Smith & Horey III, LP ........................ 900,000
2,005 Morgenthaler Venture Partners IV, LP .................. 724,065
3,583 Sevin Rosen V, LP .................................... 1,020,792
4,005 Vanguard V, LP ....................................... 1,400,000
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TOTAL PRIVATE INVESTMENT FUNDS
(Cost $5,312,037)....................................... 5,312,037
----------
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ------------ ------------
<S> <C> <C> <C>
PRIVATE COMPANIES #, @ -- 46.21%
Preferred and Common Stocks -- 46.21%
Consumer Cyclical -- 46.21%
1,136,364 AbTox Inc., Series F ........................... $ 2,500,001
2,608,696 Best Friends Pet Care Inc., Series F ............ 3,000,000
515,464 Cardiopulmonary Corp. ........................... 2,190,722
1,125,000 +CommSite International Inc., Class A ............ 1,125,000
1,875,003 +CommSite International Inc., Class B ............ 375,002
CommSite International Inc., Bridge Note ......... 862,500
294,000 LogicVision Inc., Series F ..................... 1,249,500
500,000 NeoVista Software Inc. ........................... 500,000
500,000 Party Store Holdings Inc., Series C ............ 2,000,454
572,190 Plynetics Express Inc. ........................... 1,999,999
750,000 +ProCommunications, Inc., Series C ............... 3,000,000
2,586,207 QuickLogic Corp. ................................. 3,000,000
-----------
TOTAL PRIVATE COMPANIES (Cost $24,312,456) ...... 21,803,178
-----------
PUBLIC COMPANIES #, @ -- 17.64%
Common Stocks -- 17.64%
Capital Goods -- 17.64%
363,637 ++Corsair Communications, Inc., Series F ......... 7,186,401
47,097 ++Rental Service Corp. ........................... 1,133,860
-----------
TOTAL PUBLIC COMPANIES (Cost $626,237) 8,320,261
-----------
INVESTMENT COMPANIES -- 2.22%
1,047,435 Fidelity Cash Portfolio, U.S. Treasury II
(Cost $1,047,435)................................. 1,047,435
-----------
TOTAL INVESTMENTS (Cost $41,829,598*) ........................ 99.65% 47,016,190
OTHER ASSETS & LIABILITIES (NET) ........................... 0.35 163,281
------ -----------
NET ASSETS ................................................... 100.00% $47,179,471
====== ===========
</TABLE>
* Aggregate cost for Federal tax and book purposes.
+ At October 31, 1997, the Fund owned 5% or more of the Company's outstanding
shares thereby making the Company an affiliate as defined by the Investment
Company Act of 1940. At October 31, 1997, these securities were valued at
the cost at which they were acquired during the year. There were no sales of
shares of any affiliates during the year.
++ 144 Security. Certain conditions for public sale may exist.
# Restricted as to public resale. Acquired between January 3, 1996 and October
27, 1997. Total cost of restricted securities at October 31, 1997
aggregated $30,250,731. Total market value of restricted securities owned
at October 31, 1997 was $35,435,476 or 75.1% of net assets.
@ Non-Income Producing Security
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Assets and Liabilities
October 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $41,829,598) (Note 1) .................. $47,016,190
Receivable for investments sold .................................... 348,462
Interest receivable ................................................ 207,725
Prepaid insurance ................................................... 37,024
Unamortized organization costs (Note 4) .............................. 16,490
-----------
Total Assets ...................................................... 47,625,891
LIABILITIES:
Management fees payable ............................................. 136,328
Due to custodian bank ................................................ 56,684
Directors' fees payable ............................................. 30,000
Administration fees payable .......................................... 15,330
Accrued expenses and other payables ................................. 208,078
-----------
Total Liabilities ................................................ 446,420
-----------
NET ASSETS ............................................................ $47,179,471
===========
NET ASSETS consist of:
Undistributed net investment income ................................. $ 229,824
Accumulated net realized gain on investments ........................ 1,767,041
Net unrealized appreciation of investments ........................... 5,186,592
Allowance for Management Incentive fee .............................. (122,095)
Par value ............................................................ 405
Paid-in capital in excess of par value .............................. 40,117,704
-----------
Total Net Assets ...................................................... $47,179,471
===========
Shares of Common Stock Outstanding ($0.01 par value, 100,000 authorized) 40,463
NET ASSET VALUE PER SHARE ............................................. $ 1,165.99
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Operations
For the Year Ended October 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income ................................................... $ 959,878
-----------
EXPENSES:
Managing investment advisory fees (Note 2) ........................ 588,909
Legal fees ...................................................... 105,765
Insurance expense ................................................ 75,201
Administration fees ............................................. 58,000
Directors' fees and expenses (Note 2) ........................... 30,000
Amortization of organization expense (Note 4) ..................... 5,990
Miscellaneous expenses .......................................... 44,795
-----------
Total Expenses ................................................ 908,660
Expenses reimbursed by Managing Investment Adviser (Note 2) ...... (165,453)
-----------
Net Expenses ................................................... 743,207
-----------
NET INVESTMENT INCOME ................................................ 216,671
-----------
NET REALIZED AND UNREALIZED GAIN: (Note 1)
Net realized gain on investments ................................. 1,926,352
Net change in unrealized appreciation of investments ............ 3,907,992
-----------
NET REALIZED AND UNREALIZED GAIN .................................... 5,834,344
Net change in Allowance for Management Incentive fee ............... (117,732)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............... $ 5,933,283
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Years Ended October 31,
1997 1996
--------------- ---------------
OPERATIONS:
<S> <C> <C>
Net investment income .......................................... $ 216,671 $ 1,631,796
Net realized gain on investments .............................. 1,926,352 43,640
Net change in unrealized appreciation of investments ......... 3,907,992 1,285,560
Net change in Allowance for Management Incentive fee ......... (117,732) (4,363)
------------ ------------
Net increase in net assets resulting from operations ...... 5,933,283 2,956,633
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................... (1,429,792) (389,452)
Net realized gain ............................................. (43,640) --
------------ ------------
Net increase in net assets ....................................... 4,459,851 2,567,181
NET ASSETS:
Beginning of year ............................................. 42,719,620 40,152,439
------------ ------------
End of year (including undistributed net investment income of
$229,824 and $1,283,634, respectively) ..................... $ 47,179,471 $ 42,719,620
============ ============
</TABLE>
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Cash Flows
For the Year Ended October 31, 1997
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments ........................ $ 11,508,142
Purchases of Investments ................................. (21,511,542)
Net Decrease in Short-Term Investments ..................... 10,831,314
Investment Income .......................................... 1,076,188
Operating Expenses Paid .................................... (487,455)
-------------
Net Cash Used for Investing and Operating Activities ...... 1,416,647
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid ....................................... (1,473,432)
-------------
Net Cash Provided by Financing Activities .................. (1,473,432)
-------------
Net Decrease in Cash ....................................... (56,785)
Cash at Beginning of Year .................................... 101
-------------
Cash at End of Year .......................................... $ (56,684)
=============
Reconciliation of Net Investment Income to Net Cash
Used for Investing and Operating Activities:
Net Investment Income .................................... $ 216,671
Proceeds from Sales of Investments ........................ 11,508,142
Purchases of Investments ................................. (21,511,542)
Net Decrease In Short-Term Investments ..................... 10,831,314
Net Decrease in Receivables Related to Operations ......... 307,040
Net Increase in Payables Related to Operations ............ 249,757
Amortization of Organization Costs ........................ 5,990
Accretion/Amortization of Discounts and Premiums ......... (190,725)
-------------
Net Cash Used for Investing and Operating Activities ...... $ 1,416,647
=============
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Financial Highlights - Selected Per Share Data and Ratios
<TABLE>
<CAPTION>
For a fund share outstanding throughout each period
August 1,
1995* to
Years Ended October 31, October 31,
1997 1996 1995
--------------- --------------- -------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD .................................... $ 1,055.77 $ 992.32 $ 1,000.00
------------ ------------ -------------
Offering Costs ................................. -- -- (8.53)
------------ ------------ -------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income ..................... 5.35 40.33 12.86
Net Realized and Unrealized Gain (Loss) on
Investments .............................. 144.20 32.84 (0.17)
Net Change in Allowance for Management
Incentive fee .............................. (2.91) (0.10) --
------------ ------------ -------------
Total from Investment Operations ......... 146.64 73.07 12.69
------------ ------------ -------------
DISTRIBUTIONS
Net Investment Income ..................... (35.34) (9.62) (11.84)
Net Realized Gain ........................... (1.08) -- --
------------ ------------ -------------
NET ASSET VALUE, END OF PERIOD ............... $ 1,165.99 $ 1,055.77 $ 992.32
============ ============ =============
TOTAL NET ASSET VALUE RETURN+ .................. 14.37% 7.41% 0.39%
============ ============ =============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) ...... $ 47,179 $ 42,720 $ 40,152
Ratio of Net Operating Expenses to Average
Net Assets ................................. 1.65% 1.00% 0.50%**
Ratio of Gross Operating Expenses to
Average Net Assets++ ..................... 2.02% 1.56% 2.44%**
Ratio of Net Investment Income to Average
Net Assets ................................. 0.48% 3.96% 5.18%**
Portfolio Turnover Rate ..................... 44% 10% 0%
</TABLE>
* Commencement of operations
** Annualized
+ Total investment return based on per share net asset value reflects the
effects of changes in net asset value based on the performance of the Fund
during the period, and assumes dividends and distributions, if any, were
reinvested. The Fund's shares were issued in a private placement and are
not traded, therefore market value total investment return is not
calculated. Total return for periods of less than one year are
unannualized.
++ Expense ratio before waiver of fees and reimbursement of expenses by
adviser.
See Notes to Financial Statements
<PAGE>
UST PRIVATE EQUITY INVESTORS FUND, INC.
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
UST Private Equity Investors Fund, Inc. ("the Fund") was incorporated
under the laws of the State of Maryland on September 16, 1994 and is registered
under the Securities Act of 1933, as amended, as a non-diversified, closed-end
management investment company which has elected to be treated as a business
development company under the Investment Company Act of 1940, as amended.
The following is a summary of the Fund's significant accounting policies.
Such policies are in conformity with generally accepted accounting principles
for investment companies and are consistently followed in the preparation of
the financial statements. Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
these estimates.
(a) Portfolio valuation:
The Fund values portfolio securities quarterly and at other such times as
in the Board of Directors' view, as circumstances warrant. Investments in
securities that are traded on a recognized stock exchange or on the
national securities market are valued at the last sale price for such
securities on the valuation date. Short-term debt instruments with
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market value. At October 31, 1997, market quotations were not
readily available for securities valued at $35,435,476. Such securities
were valued, pursuant to guidelines adopted by the Investment Adviser,
under the supervision of the Board of Directors. Such valuation may differ
significantly from the values at which actual transactions may occur.
(b) Security transactions and investment income:
Security transactions are recorded on a trade date basis. Realized gains
and losses on investments sold are recorded on the basis of identified
cost. Interest income, adjusted for amortization of premiums and, when
appropriate, discounts on investments, is earned from settlement date and
is recorded on the accrual basis. Dividend income is recorded on the
ex-dividend date.
(c) Repurchase agreements:
The Fund enters into agreements to purchase securities and to resell them
at a future date. It is the Fund's policy to take custody of securities
purchased and to ensure that the market value of the collateral including
accrued interest is sufficient to protect the Fund from losses incurred in
the event the counterparty does not repurchase the securities. If the
seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
(d) Federal income taxes:
It is the policy of the Fund to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code and
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
<PAGE>
Dividends from net investment income are declared and paid at least
annually. Any net realized capital gains, unless offset by any available
capital loss carryforward, are distributed to shareholders at least
annually. Dividends and distributions are determined in accordance with
Federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent. To the extent these differences are permanent, such
amounts are reclassified within the capital accounts based on their federal
tax basis treatment; temporary differences do not require reclassification.
At October 31, 1997, the tax basis of the Fund's investments for Federal
income tax purposes amounted to $41,829,598. The net unrealized
appreciation amounted to $5,186,592, which is comprised of gross unrealized
appreciation of $5,186,595 and aggregate gross unrealized depreciation of
$3.
2. Investment Advisory Fee and Related Party Transactions
Pursuant to an Investment Management Agreement ("Agreement"), United
States Trust Company of New York ("U.S. Trust") serves as the Managing
Investment Adviser to the Fund. Under the Agreement, for the services provided,
U.S. Trust is entitled to receive a fee, at the annual rate of 1.50% of the net
assets of the Fund, determined as of the end of each fiscal quarter, that are
invested or committed to be invested in Portfolio Companies or Private Funds
and equal to an annual rate of 0.50% of the net assets of the Fund, determined
as of the end of each fiscal quarter, that are invested in short-term
investments and are not committed to Portfolio Companies or Private Funds.
In addition to the management fee, the Fund has agreed to pay U.S. Trust
an incentive fee in an amount equal to 10% of the cumulative realized capital
gains (net of realized capital losses and unrealized net capital depreciation),
less the aggregate amount of incentive fee payments in prior years. If the
amount of the incentive fee in any year is a negative number, or cumulative net
realized gains less net unrealized capital depreciation at the end of any year
is less than such amount calculated at the end of the previous year U.S. Trust
will be required to repay the Fund all or a portion of the incentive fee
previously paid.
U.S. Trust has voluntarily agreed to waive or reimburse other operating
expenses of the Fund, exclusive of management fees, to the extent they exceed
0.42% of the Fund's net assets, and U.S. Trust will waive or reimburse,
exclusive of management fees, all such expenses with respect to that portion of
the Fund's net assets, determined as of the end of each fiscal quarter, that is
invested in short-term investments.
For the year ended October 31, 1997, brokerage commissions on investment
transactions paid to affiliates amounted to $578.
Each Director of the Fund receives an annual fee of $9,000, plus a meeting
fee of $1,500 for each meeting attended, and is reimbursed for expenses
incurred for attending meetings. No person who is an officer, director or
employee of U.S. Trust, or of any parent or subsidiary thereof, who serves as
an officer, director or employee of the Fund receives any compensation from the
Fund.
3. Purchases and Sales of Securities
Purchases and sales of securities, excluding short-term investments, for
the Fund aggregated $21,053,592 and $11,856,604, respectively.
At October 31, 1997, the Fund had outstanding investment commitments
totaling $7,187,963.
4. Organization Costs:
The Fund has borne all costs in connection with the initial organization
of the Fund. All such costs are being amortized on a straight-line basis over a
period of five years from the date on which the Fund commenced operations.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
UST Private Equity Investors Fund, Inc.
We have audited the accompanying statement of assets and liabilities of UST
Private Equity Investors Fund, Inc., including the portfolio of investments, as
of October 31, 1997, the related statements of operations and cash flows for
the year then ended, and the statements of changes in net assets for each of
the two years in the period then ended and financial highlights for each of the
indicated periods. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997 by correspondence with the custodian and others. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of UST
Private Equity Investors Fund, Inc. at October 31, 1997, the results of its
operations and its cash flows for the year then ended, and the changes in net
assets for each of the two years then ended, and the financial highlights for
each of the periods indicated in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
New York, New York
December 22, 1997
<PAGE>
Federal Income Tax Information (Unaudited)
For the year ended October 31, 1997, the Fund designates $72,065 as
long-term capital gain dividends for the purpose of the dividend paid deduction
on its federal income tax returns.
The percentage of income earned from direct treasury obligations was
20.01% for the Fund.
