<PAGE>
-----------------------------------
UST
PRIVATE EQUITY
INVESTORS FUND, INC.
-----------------------------------
ANNUAL REPORT
October 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
To Our Shareholders:
In 1997, somewhat less than two years after its October 1995 closing, UST
Private Equity Investors Fund, Inc. (the "Fund") completed the construction of
its private equity investment portfolio. The Fund has made a total of twelve
investments in private companies and six investments in private equity
investment funds.
Of the original $40.5 million raised, $27.7 million has been invested in twelve
companies and $715,103 is reserved for possible follow-on investments. In
addition, $12.0 million has been committed to the six fund investments, of
which $9.2 million has been drawn.
Since its inception, the Fund has paid out three dividends totaling over $4.0
million. An additional dividend will be declared and paid during December 1998.
The Fund's Portfolio as of October 31, 1998:
- --------------------------------------------
Direct Investments
- ------------------
<TABLE>
<CAPTION>
<S> <C>
Investments sold ......................... Rental Service Corp.
Investments held (public) ................ Corsair Communications, Inc.
Investments held (private) ............... Best Friends Pet Care, Inc.
Cardiopulmonary Corp.
CommSite International, Inc.
LogicVision, Inc.
NeoVista Software, Inc.
Signius Corp.
QuickLogic Corp.
Investments written-off .................. Abtox, Inc.
P2 Holdings Corp.
Party Stores Holdings, Inc.
Fund Investments
- ----------------
Investments in third-party funds ......... Brentwood Associates Buyout Fund II, LP
Bruckmann, Rosser, Sherrill & Co., LP
Lawrence, Smith & Horey III, LP
Morgenthaler Venture Partners IV, LP
Sevin Rosen V, LP
Vanguard V, LP
</TABLE>
Direct Investments
- ------------------
Private companies were not entirely immune to the volatility in the capital
markets and the tightening of commercial credit, especially as it related to
small companies, during the second half of 1998. A few of our portfolio
companies explored initial public offerings, but were halted in the process by
the public market climate after August. Other portfolio companies that we
believed could secure commercial bank financing at attractive borrowing rates
were instead forced to seek additional private equity.
Investments sold
- ----------------
o Rental Service Corp., Scottsdale, AZ, (ticker: "RSV", New York Stock
Exchange) is a consolidator of heavy equipment rental companies. In January
1996, the Fund invested in the company at $7.03 per share. RSV subsequently
completed an initial public offering in September 1996. We have since sold
our position in the company at an average of $21.60 per share representing
the Fund's first completely realized investment.
<PAGE>
Investments held (public)
- -------------------------
o Corsair Communications, Inc., Palo Alto, CA, (ticker: "CAIR", Nasdaq) is a
provider of equipment and services to wireless communications providers. The
company has successfully deployed its products both domestically and abroad.
In July 1997, Corsair completed an initial public offering priced at $15.00
per share and eventually traded to a high of $27.625 per share on October
13, 1997. During the course of 1998, the company acquired Subscriber
Computing. Subsequent to the acquisition, the company missed its June 1998
quarterly earnings estimates. This situation, combined with the sell-off of
small capitalization stocks beginning in August and the difficulties facing
telecommunications equipment companies with international exposure, caused
the stock price to decline sharply. It currently trades at approximately
$5.00 per share.
Investments held (private)
- --------------------------
o Best Friends Pet Care Inc., Norwalk, CT, is an innovative pet boarding and
grooming concept. The company's facilities offer a wide range of pet
services including boarding, grooming and training. With 22 locations, the
company believes it is the largest provider of pet boarding services in the
country. Best Friends is currently rolling out new facilities throughout New
England.
o Cardiopulmonary Corp., Milford, CT, designs, develops and assembles advanced
software-driven ventilators, representing a new generation of life support
technology for the treatment of intensive care patients. The technology,
developed at Yale University Hospital, New Haven, received FDA approval
during the Fund's 1998 fiscal year allowing Cardiopulmonary to begin selling
its products in the United States. The company's first product, the Venturi
ventilator, incorporates proprietary "smart" software and pneumatic
hardware. The company believes that its products will improve clinical
results, decrease the length of hospital stays and reduce treatment costs.
o CommSite International, Inc., Vienna, VA, is a national wireless antennae
site location and site management company serving paging, cellular,
specialized mobile radio, and personal communications services carriers. In
April 1998, CommSite received $13.0 million in additional equity financing
in a transaction which valued the per share price at a greater value than
the Fund's original cost. The capital raised will be used to continue to
acquire and build communications towers. The company recently secured
contracts to build one hundred new communications towers.
o LogicVision, Inc., San Jose, CA, is a developer of built-in semiconductor
testing software. As semiconductors become more complex (i.e. large systems
reduced to a customized chip), the need for adopting new testing technology
is becoming critical. LogicVision operates globally and counts among its
customers Sun Microsystems, Cisco Systems, NCR Corp., Hitachi and Hughes.
The company also recently announced a partnership with Credence Systems
Corp. that will involve linking the LogicVision embedded ATE solution with
Credence's semiconductor test systems.
o NeoVista Software, Inc., Cupertino, CA, is a company engaged in developing
data mining software applications. Data mining allows companies to discover
non-obvious relationships by applying various artificial intelligence
algorithms to data that have been deposited into data warehouses. The
software allows companies to make use of information that in the past has
been collected, but not effectively interpreted. Corporate applications of
NeoVista's products include inventory management, customer profiling,
behavior prediction and fraud detection.
o Signius Corp., Somerset, NJ, (formerly known as ProCommunications, Inc.)
provides telemessaging services for small and medium sized businesses. The
company believes it is now the largest multi-site telemessaging company in
the United States with 45 locations and over 1,000 employees. Among Signius'
service offerings are voice mail, custom call processing, alpha-numeric
dispatch, inbound order taking, claims processing and interactive voice
response services.
<PAGE>
o QuickLogic Corp., San Jose, CA, designs, manufactures and markets
high-capacity programmable logic semiconductors, known as field programmable
gate arrays (FPGAs), along with comprehensive design software. The company's
products shorten the design cycle time for electronic systems, accelerating
time-to-market. QuickLogic recently announced a new class of devices,
embedded standard products (ESPs), which facilitate extremely fast
development of complex systems.
Investments written-off
- -----------------------
o AbTox, Inc., Mundelein, IL, manufactured gas plasma sterilizers used in
hospitals and by medical equipment companies. In April 1998, the Food and
Drug Administration (the "FDA") notified the company that it had not
received FDA clearance to sell the company's Plazlyte sterilizer. Further,
the FDA indicated that it had believed the sterilizer posed a safety issue
when used on medical instruments used in eye surgeries and medical
instruments containing copper, zinc, or brass. The FDA acknowledged that the
company did receive FDA clearance for a prior product also called the
Plazlyte Sterilization System, which the company never commercially
marketed. Subsequently, in July, 1998 the company sought Chapter 11
Bankruptcy protection and ceased marketing its product.
Our investment was predicated on the potential growth of a new sterilizer that
had over 150 units installed at some of the most prestigious medical
institutions and hospitals in the world. Furthermore, at the time of our
investment we received copies of FDA clearance letters that we believed at the
time accurately reflect the product's regulatory position. We sought and
received the requisite legal representations and warranties regarding the
company, its products, and its regulatory status in the Purchase Agreements
which we now believe the company breached. As a result, we are currently
exploring all recovery avenues including possible legal remedies. We are
uncertain of the amount of recovery, if any, that we may receive and,
accordingly have written off this investment.
o Party Stores Holdings, Inc., Melville, NY, was a dominant party store concept
chain in New York with a stronghold on Long Island. In 1997, the Fund
invested in the company on the premise that it would help to fund the
acquisition of two geographically contiguous chains, Paperama and Paper
Cutters. Both of these acquisitions were turnaround situations. However, the
problems were more severe than originally anticipated and the combined
entity required significantly more capital. In early 1998, the Fund and the
other investors chose not to invest more equity, as it was unclear how the
business could be made economically viable. As a result, the company filed
for Chapter 11 Bankruptcy protection in January 1998. The Fund does not
anticipate any recovery from this investment.
o P2 Holdings Corp. (also known as Plynetics Express), San Leandro, CA, was a
provider of rapid prototyping and rapid tooling services. At the time of our
investment, we believed the outsourcing of prototyping and tooling services
to be a rapidly growing industry with significant fragmentation. P2 sought
to consolidate this industry and provide customers with a national,
multi-site solution. During the course of this year, P2 struggled as the
industry entered a downturn. Quickly, the company became a high fixed cost
manufacturer and service provider in an industry that was undergoing
significant pricing pressure. As a result, the company imposed several cost
cutting initiatives but was unable to protect its margins from
deteriorating. In October, the Fund perceived the company's viability to be
in serious doubt and wrote-off its investment. No recovery is expected for
the company's shareholders.
Fund Investments
- ----------------
We are beginning to see meaningful progress in our fund investments portfolio.
In April 1998, we received stock distributions of Cisco Systems, a worldwide
leader in networking for the Internet,
<PAGE>
from both Sevin Rosen V, LP and Vanguard V, LP. Both funds had invested in
LightSpeed International, a company that Cisco acquired in December 1997. As a
result of the acquisition, we received a total of approximately 21,000 shares
of Cisco that we sold at an average price of $79.04 per share.
Other distributions the Fund received during fiscal 1998 resulted from events
such as Morgenthaler Ventures Partners IV, LP's sale of Aptis, a portfolio
company of the fund, to Nortel. Our pro rata distribution consisted of 6,668
shares of Nortel that the Fund received in October 1998. We also received a
cash distribution from Bruckmann, Rosser, Sherrill & Co. ("BRS"). BRS sold its
position in Restaurants Associates Corp. to Compass Group plc, resulting in
distributions to the Fund totaling $200,000. Detailed below are brief
descriptions of the investment focus of each of the six private funds in which
we are investors as well as selected portfolio companies held by the private
funds.
Investments in third-party funds
- --------------------------------
o Brentwood Associates Buyout Fund II, LP ("Brentwood") specializes in
consolidating businesses in fragmented industries. Brentwood has acquired a
total of eight companies to date including Classroom Connect, Inc., a
provider of educational Internet products, in which Excelsior Private Equity
Fund II, Inc. (an affiliate of the Fund) is also invested. Other companies
in Brentwood's portfolio include Aspen Marketing Group, Inc., a company in
the promotional marketing industry and WorldPoint Logistics, Inc., a player
in the third party logistics industry. In August, 1998 Clinical
Communications Group, Inc., a provider of educational and promotional
materials for the pharmaceutical industry, was sold to Snyder
Communications, for approximately two times Brentwood's original cost of $20
million.
o Bruckmann, Rosser, Sherrill & Co., LP ("BRS") is a leveraged buyout fund
targeting acquisitions in stable industries. Among BRS's recent transactions
are acquisitions of Mediq (healthcare services), California Pizza Kitchen
(specialty restaurants) and Penhall International, Inc. (operator-assisted
equipment rental provider). In July, 1998 BRS sold one of its portfolio
companies, Restaurant Associates Corp., to Compass Group plc, resulting in a
4.75 times return on BRS's cost and a distribution of approximately $200,000
to the Fund.
o Lawrence, Smith & Horey III, LP, ("LSH") targets later-stage and new media
investment opportunities on the East Coast. Approximately three-quarters of
LSH have been invested to date in a portfolio of nine companies. Among LSH's
investments are Signius Corp. and CommSite International, Inc., both direct
investments of the Fund. LSH's other investments include National Network
Technologies, Inc., a provider of installation and maintenance services for
all major communications carriers in the New York marketplace besides Bell
Atlantic, and Shuttle America, a start-up commuter airline.
o Morgenthaler Venture Partners IV, LP ("Morgenthaler") invests in healthcare
and information technology companies across all investment stages on a
national basis. In June, Nortel acquired Aptis, one of Morgenthaler's
portfolio companies, returning 5.9 times the fund's cost. The Fund received
6,668 shares of Nortel valued at approximately $232,000. To date,
Morgenthaler's portfolio consists of 23 companies including Molecular
Applications Group, Inc., a company in the drug design automation software
market and Nuance Communications, Inc., which develops speech recognition
and natural language understanding software.
o Sevin Rosen V, LP ("Sevin Rosen") invests in early-stage technology
companies. In 1998, Sevin Rosen invested in several companies including
Airspan Communications, a designer, manufacturer and seller of wireless
local loop (WLL) systems to replace copper cable running between a telephone
central office and a telephone subscriber location. The fund also invested
in Decision.ism, Inc., a company that develops and markets software for data
mart management. As a result of Sevin Rosen's investment in LightSpeed
International, a company that was acquired by Cisco Systems in December
1997, the Fund received 7,000 shares of Cisco Systems in April 1998.
<PAGE>
o Vanguard V, LP ("Vanguard") invests in seed and early stage companies in the
communications, life science and computer sectors primarily on the West
Coast and in the Southwest. In April 1998, the Fund received a distribution
of approximately 13,600 shares of Cisco Systems from Vanguard. The
distribution resulted from Cisco's purchase of LightSpeed International,
another company in the Vanguard portfolio. Vanguard's portfolio also
includes ImageX.com, a low cost Internet/Intranet solution to enable
businesses to order their printed materials and Fujant Technologies which is
building a family of multi-carrier power amplifiers and active antennae for
use in cellular and PCS base stations.
We believe that the investment portfolio is making significant progress and
will keep you posted as developments unfold.
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, 1998
<TABLE>
<CAPTION>
Principal Coupon Value
Amount/Shares Rate/Yield (Note 1)
- ----------------- ------------ -----------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 2.64%
$ 1,000,000 General Electric Capital Corp., 12/11/98
(Cost $1,000,000)......................................... 5.11% $1,000,000
----------
CORPORATE BONDS -- 1.02%
142,000 AT&T Corp., 5/01/99 ...................................... 4.38 141,631
150,000 Bank of New York (Delaware), 2/12/99 ..................... 5.42 150,039
95,000 Merrill Lynch & Co., 2/16/99 ............................. 5.50 95,247
----------
TOTAL CORPORATE BONDS (Cost $385,641) .................... 386,917
----------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 31.54%
1,000,000 Federal Farm Credit Bank, 11/19/98 ....................... 4.77** 997,615
1,000,000 Federal Home Loan Bank, 11/02/98 ......................... 5.40** 999,850
1,000,000 Federal Home Loan Mortgage Corp., 11/30/98 ............... 5.09** 995,900
1,000,000 Federal National Mortgage Association, 11/04/98 .......... 5.34** 999,555
***8,000,000 U.S. Treasury Bill, 12/17/98 ............................. 3.75** 7,961,667
----------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS (Cost $11,954,587)............................ 11,954,587
----------
PRIVATE INVESTMENT FUNDS #, @ -- 27.14%
943 Brentwood Associates Buyout Fund II, LP .................. 1,470,378
1,388 Bruckmann, Rosser, Sherrill & Co., LP .................... 2,066,227
6,005 Lawrence, Smith & Horey III, LP .......................... 1,434,769
2,008 Morgenthaler Venture Partners IV, LP ..................... 1,320,455
3,586 Sevin Rosen Fund V, LP ................................... 1,925,527
4,007 Vanguard V, LP ........................................... 2,072,800
----------
TOTAL PRIVATE INVESTMENT FUNDS
(Cost $8,309,479)......................................... 10,290,156
----------
PRIVATE COMPANIES #, @ -- 47.86%
Preferred and Common Stocks -- 47.22%
Business Services -- 8.28%
750,000 +--+Signius Corporation, Series C ......................... 3,000,000
+--+Signius Corporation, Bridge Note ...................... 139,056
----------
3,139,056
----------
Communications Services -- 11.28%
1,125,000 +CommSite International, Inc., Series A .................. 1,125,000
1,875,000 +CommSite International, Inc., Series B .................. 1,931,250
1,183,252 +CommSite International, Inc., Series C .................. 1,218,750
----------
4,275,000
----------
Computer Software -- 2.36%
537,521 +NeoVista Software, Inc., Series V ....................... 537,521
475,481 +NeoVista Software, Inc., Series VI ...................... 356,611
----------
894,132
----------
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
No. of Value
Warrants/Shares (Note 1)
- --------------- ------------
<S> <C>
PRIVATE COMPANIES -- (Continued)
Preferred and Common Stocks -- (Continued)
Medical Devices -- 6.18%
1,136,364 AbTox Inc., Series F .............................. --
515,464 +Cardiopulmonary Corp., Series D ................... $ 2,190,722
35,294 +Cardiopulmonary Corp., Series F ................... 149,999
------------
2,340,721
------------
Semiconductors -- 11.21%
294,000 LogicVision, Inc., Series F ........................ 1,249,500
2,586,207 QuickLogic Corp., Series F ......................... 3,000,000
------------
4,249,500
------------
Specialty Industry Machinery -- 0.00%
572,190 P2 Holdings Corp., Series A ........................ --
1,395,442 P2 Holdings Corp., Series B ........................ --
------------
--
------------
Specialty Retail -- 7.91%
2,608,696 +Best Friends Pet Care, Inc., Series F ............. 3,000,000
------------
17,898,409
------------
Warrants -- 0.64%
Communication Services -- 0.64%
236,650 +CommSite International Inc., Series C ............. 243,749
34,764 +--+Signius Corporation ............................. --
------------
243,749
------------
TOTAL PRIVATE COMPANIES
(Cost $21,701,078).................................. 18,142,158
------------
PUBLIC COMPANIES -- 5.55%
Common Stocks -- 5.55%
Telecommunications -- 5.55%
363,637 Corsair Communications, Inc. ....................... 1,818,185
6,668 Northern Telecom Ltd. .............................. 285,474
------------
TOTAL PUBLIC COMPANIES
(Cost $3,046,895)................................... 2,103,659
------------
INVESTMENT COMPANIES -- 4.17%
981,500 Dreyfus Treasury Cash Management Fund .............. 981,500
600,413 Fidelity Cash Portfolio, U.S. Treasury II .......... 600,413
------------
TOTAL INVESTMENT COMPANIES
(Cost $1,581,913)................................... 1,581,913
------------
TOTAL INVESTMENTS (Cost $47,979,593*) .............................. 119.92% 45,459,390
------------
OTHER ASSETS &LIABILITIES (NET) .................................... (19.92) (7,552,198)
------- ------------
NET ASSETS ......................................................... 100.00% $ 37,907,192
======= ============
</TABLE>
See Notes to Financial Statements
<PAGE>
* Aggregate cost for Federal tax and book purposes.
** Discount Rate
*** Held as collateral for the note payable.
+-- The Company changed its name from ProCommunications, Inc.
+ At October 31, 1998, 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, 1998, 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. Total market value
of affiliated securities owned at October 31, 1998 was $13,892,658.
# Restricted as to public resale. Acquired between January 3, 1996 and
October 30, 1998. Total cost of restricted securities at October 31, 1998
aggregated $30,010,557. Total market value of restricted securities owned
at October 31, 1998 was $28,432,314 or 75.0% 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, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $47,979,593) (Note 1).................... $ 45,459,390
Cash ................................................................ 603,540
Interest receivable ................................................. 29,488
Prepaid expenses .................................................... 19,428
------------
Total Assets ..................................................... 46,111,846
LIABILITIES:
Management fees payable (Note 2) .................................... 91,688
Directors' fees payable (Note 2) .................................... 30,000
Administration fees payable (Note 2) ................................ 15,531
Note payable (Note 5) ............................................... 8,000,000
Accrued expenses and other payables ................................. 67,435
------------
Total Liabilities ................................................ 8,204,654
------------
NET ASSETS ............................................................. $ 37,907,192
============
NET ASSETS consist of:
Undistributed net investment income ................................. $ 417,716
Accumulated net realized gain on investments ........................ 239,917
Net unrealized depreciation of investments .......................... (2,520,203)
Par value ........................................................... 405
Paid-in capital in excess of par value .............................. 39,769,357
------------
Total Net Assets ....................................................... $ 37,907,192
============
Shares of Common Stock Outstanding ($0.01 par value, 100,000 authorized) 40,463
NET ASSET VALUE PER SHARE .............................................. $ 936.84
============
</TABLE>
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See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Operations
For the Year Ended October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income ..................................................... $ 569,706
------------
EXPENSES:
Managing investment advisory fees (Note 2) .......................... 549,137
Legal fees .......................................................... 60,000
Administration fees (Note 2) ........................................ 58,000
Interest Expense on Loans (Note 5) .................................. 37,227
Directors' fees and expenses (Note 2) ............................... 30,000
Amortization of organization expense (Note 4) ....................... 16,490
Insurance expense ................................................... 13,685
Miscellaneous expenses .............................................. 41,787
------------
Total Expenses ................................................... 806,326
Expenses reimbursed by Managing Investment Adviser (Note 2) ......... (76,165)
------------
Net Expenses ..................................................... 730,161
------------
NET INVESTMENT LOSS .................................................... (160,455)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS): (Note 1)
Net realized gain on investments .................................... 356,562
Net change in unrealized depreciation of investments ................ (7,706,795)
------------
NET REALIZED AND UNREALIZED LOSS ....................................... (7,350,233)
Net change in Allowance for Management Incentive fee ................... 122,095
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................... $ (7,388,593)
============
</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,
1998 1997
----------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ................................. $ (160,455) $ 216,671
Net realized gain on investments ............................. 356,562 1,926,352
Net change in unrealized appreciation (depreciation) of
investments ................................................ (7,706,795) 3,907,992
Net change in Allowance for Management Incentive fee ......... 122,095 (117,732)
----------- ------------
Net increase (decrease) in net assets resulting from
operations ............................................ (7,388,593) 5,933,283
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................................ -- (1,429,792)
Net realized gain ............................................ (1,883,686) (43,640)
----------- ------------
Net increase in net assets ...................................... (9,272,279) 4,459,851
NET ASSETS:
Beginning of year ............................................ 47,179,471 42,719,620
----------- ------------
End of year (including undistributed net investment income
of $417,716 and $229,824, respectively)..................... $37,907,192 $ 47,179,471
=========== ============
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Cash Flows
For the Year Ended October 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments ........................... $ 4,641,123
Purchases of Investments ..................................... (7,074,067)
Net Increase in Short-Term Investments ....................... (3,012,027)
Investment Income ............................................ 747,943
Interest Paid ................................................ (33,241)
Operating Expenses Paid ...................................... (725,821)
------------
Net Cash Used for Investing and Operating Activities ......... (5,456,090)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid ........................................... (1,883,686)
Cash Receipts from Borrowings ................................ 8,000,000
------------
Net Cash Provided by Financing Activities .................... 6,116,314
------------
Net Increase in Cash ......................................... 660,224
Cash at Beginning of Year ....................................... (56,684)
------------
Cash at End of Year ............................................. $ 603,540
============
Reconciliation of Net Investment Income to Net Cash Used
for Investing and Operating Activities:
Net Investment Loss .......................................... $ (160,455)
Proceeds from Sales of Investments ........................... 4,641,123
Purchases of Investments ..................................... (7,074,067)
Net Increase in Short-Term Investments ....................... (3,012,027)
Net Decrease in Receivables Related to Operations ............ 195,833
Net Decrease in Payables Related to Operations ............... (204,297)
Amortization of Organization Costs ........................... 16,490
Accretion/Amortization of Discounts and Premiums ............. 141,310
------------
Net Cash Used for Investing and Operating Activities ......... $ (5,456,090)
============
</TABLE>
- --------------------------------------------------------------------------------
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,
1998 1997 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................... $ 1,165.99 $ 1,055.77 $ 992.32 $ 1,000.00
---------- ---------- ---------- ----------
Offering Costs ........................ -- -- -- (8.53)
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income (Loss) ....... (3.97) 5.35 40.33 12.86
Net Realized and Unrealized Gain
(Loss) on Investments ............. (181.64) 144.20 32.84 (0.17)
Net change in Allowance for
Management Incentive fee .......... 3.01 (2.91) (0.10) --
---------- ---------- ---------- ----------
Total from Investment
Operations ..................... (182.60) 146.64 73.07 12.69
---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income .............. -- (35.34) (9.62) (11.84)
Net Realized Gain .................. (46.55) (1.08) -- --
---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD......... $ 936.84 $ 1,165.99 $ 1,055.77 $ 992.32
========== ========== ========== ==========
TOTAL NET ASSET VALUE RETURN+.......... (16.22)% 14.37% 7.41% 0.39%
========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(Thousands) ....................... $ 37,907 $ 47,179 $ 42,720 $ 40,152
Ratio of Net Operating Expenses to
Average Net Assets ................ 1.77% 1.65% 1.00% 0.50%**
Ratio of Gross Operating Expenses
to Average Net Assets++ ........... 1.95% 2.02% 1.56% 2.44%**
Ratio of Net Investment Income to
Average Net Assets ................ (0.39)% 0.48% 3.96% 5.18%**
Interest Expense Ratio ............. 0.09% N/A N/A N/A
Portfolio Turnover Rate ............ 11% 44% 10% 0%
</TABLE>
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* Commencement of operations
** Annualized
+ Total investment return based on per share net asset value reflects the
effects of changes in net asset value based on the performance of the Fund
during the period, and assumes dividends and distributions, if any, were
reinvested. The Fund's shares were issued in a private placement and are
not traded, therefore market value total investment return is not
calculated. Total return for periods of less than one year are
unannualized.
++ Expense ratio before waiver of fees and reimbursement of expenses by
adviser.
See Notes to Financial Statements
<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. Direct equity investments that are the same
class as a class of stock that is registered and publicly traded, but are
subject to regulatory holding periods or other restrictions, are valued
based upon the last sales price of the unrestricted stock on the securities
exchange on which such securities are primarily traded, less a liquidity
discount determined by the Investment Adviser. Direct equity investments
for which market quotations are not readily available are carried at fair
value as determined in good faith by the Investment Adviser after
considering certain pertinent factors, including the cost of the
investment, developments since the acquisition of the investment,
comparisons to similar publicly traded investments, subsequent purchases of
the same investment by other investors, the current financial position and
operating results of the issuer and such other factors as may be deemed
relevant. Investments in limited partnerships are carried at fair value as
determined by the Investment Adviser. In establishing the fair value of
investments in other partnerships, the Investment Adviser takes into
consideration information received from those partnerships, including their
financial statements and the fair value established by the general partner
of the investee partnership.
At October 31, 1998, market quotations were not readily available for
securities valued at $28,432,314. Such securities were valued by the
Investment Adviser, under the supervision of the Board of Directors.
Because of the inherent uncertainty of valuation, the estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
(b) Security transactions and investment income:
Security transactions are recorded on a trade date basis. Realized gains
and losses on investments sold are recorded on the basis of identified
cost. Interest income, adjusted for amortization of premiums and, 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.
<PAGE>
(c) Repurchase agreements:
The Fund enters into agreements to purchase securities and to resell them
at a future date. It is the Fund's policy to take custody of securities
purchased and to ensure that the market value of the collateral including
accrued interest is sufficient to protect the Fund from losses incurred in
the event the counterparty does not repurchase the securities. If the
seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
(d) Federal income taxes:
It is the policy of the Fund to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code and
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least
annually. Any net realized capital gains, unless offset by any available
capital loss carryforward, are distributed to shareholders at least
annually. Dividends and distributions are determined in accordance with
Federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent. To the extent these differences are permanent, such
amounts are reclassified within the capital accounts based on their federal
tax basis treatment; temporary differences do not require reclassification.
At October 31, 1998 the tax basis of the Fund's investments for Federal
income tax purposes amounted to $47,979,593. The net unrealized
depreciation amounted to $2,520,203, which is comprised of gross unrealized
appreciation of $4,243,097 and aggregate gross unrealized depreciation of
$6,763,300.
2. Investment Advisory Fee, Administration Fee, and Related Party Transactions
Pursuant to an Investment Management Agreement ("Agreement"), United
States Trust Company of New York ("U.S. Trust") serves as the Managing
Investment Adviser to the Fund. Under the Agreement, for the services provided,
U.S. Trust is entitled to receive a fee, at the annual rate of 1.50% of the net
assets of the Fund, determined as of the end of each fiscal quarter, that are
invested or committed to be invested in Portfolio Companies or Private Funds
and equal to an annual rate of 0.50% of the net assets of the Fund, determined
as of the end of each fiscal quarter, that are invested in short-term
investments and are not committed to Portfolio Companies or Private Funds.
In addition to the management fee, the Fund has agreed to pay U.S. Trust
an incentive fee in an amount equal to 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.
Chase Global Funds Services Company ("CGFSC"), a corporate affiliate of
The Chase Manhattan Bank, (the "Administrator") provides administrative
services to the Fund. For the services provided to the Portfolio, the
Administrator is entitled to an annual fee of $58,000, which is paid quarterly.
<PAGE>
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.
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 $7,074,067 and $3,870,893, respectively.
At October 31, 1998, the Fund had outstanding investment commitments
totaling $2,919,821.
4. Organization Costs
The Fund has borne all costs in connection with the initial organization
of the Fund. The Fund expensed all remaining organization costs, totaling
$16,490, as of October 31, 1998.
5. Note Payable
At October 31, 1998 the Fund had an $8,000,000 note payable to The Chase
Manhattan Bank. The proceeds were used for temporary investment purposes. The
note had an interest rate equal to the Federal Funds rate plus 0.50%. The note
was collateralized by a United States Treasury Bill which is identified in the
Schedule of Investments. The note was paid in its entirety on November 2, 1998.
The average daily amount of borrowings during the period ended October 31, 1998
was $589,041 with a related weighted average annualized interest rate of 6.09%.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
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, 1998, the related statement of operations and statement of cash
flows for the year then ended, the statements of changes in net assets for each
of the two years then ended and the financial highlights for each of the
indicated periods. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with 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, 1998 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, 1998, the results of its
operations and its cash flows for the year then ended, the changes in net
assets for each of the two years then ended and the financial highlights for
each of the indicated periods in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
----------------------------
New York, New York
December 16, 1998
<PAGE>
Federal Income Tax Information (Unaudited)
For the year ended October 31, 1998, the Fund designates $1,288,601 and
$640,453 at 20% and 28%, respectively, as long-term capital gain dividends for
the purpose of the dividend paid deduction on its federal income tax return.
The percentage of income earned from direct treasury obligations was
32.07% for the Fund.
Y2K (Unaudited)
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be affected adversely if the
computer systems used by the Investment Adviser and the Fund's other service
providers do not properly process and calculate date-related information and
data from and after January 1, 2000. This is commonly known as the "Year 2000
Problem." The Investment Adviser and the Fund's other service providers have
informed the Fund that they are taking steps to address the Year 2000 Problem
with respect to the computer systems that they use. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund as a result of the Year 2000 Problem.
