<PAGE>
____________________
UST
Private Equity
Investors Fund, Inc.
____________________
ANNUAL REPORT
October 31, 2000
<PAGE>
LETTER TO SHAREHOLDERS
--------------------------------------------------------------------------------
Dear Shareholders,
We are pleased to provide you with the 2000 Annual Report for the UST Private
Equity Investors Fund, Inc. (the "Fund").
Now in its fifth year of existence, the Fund is fully committed, having
invested all of the initial capital raised, and is currently in its "harvest"
mode. Through December 2000, the Fund anticipates distributing to investors
approximately 78% of the investors' original investment. The Fund intends to
continue making distributions as they are generated on a regular basis.
With respect to performance, we measure the Fund's return in two ways. To be
consistent with the manner in which nearly all other venture capital and
private equity funds measure performance, we use the internal rate of return
("IRR") metric. The IRR measures the performance of the Fund's direct and
private fund investments only, excluding the cash portion of the portfolio
invested in money market instruments. From inception through the fiscal year
ended October 31, 2000, the Fund's IRR on its capital at risk in private equity
was 12.0%. We also provide the Fund's total return, including the cash portion
of the portfolio and including an imputed reinvestment rate consistent with the
Security and Exchange Commission's performance measure methodology. Calculated
this way, the Fund achieved a total return of 35.4% for the fiscal year ended
October 31, 2000, and it has generated an 8.0% average annualized total return
since its commencement of operations on August 1, 1995.
We've chosen to remain diversified--across industry, across stage (although
with a late stage bias) and between venture capital and leveraged buyouts. As
we reflect on the performance of the Fund, we believe that our "new economy"
investments in the technology sectors significantly outperformed our
investments in the "old economy" and that our investments in relatively earlier
stage companies outperformed our investments in more mature companies. In
summary, our venture capital strategy outperformed our "buy and build" buyout
strategy.
Direct Investments
Investment Exits
. Corsair Communications, Inc. (NASDAQ: CAIR), Palo Alto, CA, is a wireless
communication infrastructure company providing prepaid cellular handset and
fraud detection equipment and software. Corsair completed its initial public
offering in July 1997. The Fund has sold all of its shares in Corsair. The
Fund realized a return of 1.55x on its $3.3 million investment.
. Rental Services Corporation (NYSE: RSV), Scottsdale, AZ, is a consolidator
of heavy equipment rental businesses. The Fund invested $1 million in
January 1996. In September 1996, Rental Services Corp. completed its initial
public offering. The Fund sold its position in the company for over $3
million, 3.1x the cost to the Fund.
. CommSite International, Inc., Vienna, VA, is a provider of wireless towers
and construction services. On May 13, 1999, American Tower Corporation
(NYSE: AMT) acquired CommSite. The Fund realized its investment cost of $2.7
million from this transaction.
. Signius Corporation (formerly known as ProCommunications, Corp.), Somerset,
NJ, provides telemessaging services for small and medium sized businesses.
In March 2000, Signius was sold for a nominal amount.
<PAGE>
Investments Held -- Public
. QuickLogic Corp. (NASDAQ: QUIK), Sunnyvale, CA, 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 for electronic systems,
accelerating time-to-market. QuickLogic completed its initial public
offering in October 1999. As of October 31, 2000, the Fund sold 345,865
shares of QuickLogic for $7.8 million and held 85,170 shares, which were
trading at approximately $8 7/8 per share.
. Accrue Software, Inc. (NASDAQ: ACRU), NeoVista Software, Inc., Cupertino,
CA, develops data mining software applications. Accrue Software acquired
NeoVista Software for $140 million of Accrue stock. Accrue is a provider of
customer relationship management software. As of October 31, 2000, the Fund
had sold 25,000 shares of Accrue for $967,499 and still held 50,197 shares,
which were trading at approximately $4 5/8 per share. The Fund had invested
$894,132 in NeoVista.
Investments Held -- Private
. Best Friends Pet Care, Inc., Norwalk, CT, 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. On October 31,
2000 the Fund wrote-down its investment in Best Friends by 50%.
. LogicVision, Inc., San Jose, CA, 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
customized chips), the need to adopt new testing technology becomes
critical. LogicVision's customers include Sun Microsystems, Cisco Systems,
NCR Corp., Hitachi and Hughes. On August 11, 2000, LogicVision filed a
registration statement with the Securities and Exchange Commission relating
to a proposed initial public offering of its common stock. Chase H&Q will
act as the lead underwriter of the offering. Other managing underwriters of
the offering include Robertson Stephens and SG Cowen.
Investments Written-Off
. AbTox, Inc., Mundelein, IL, manufactured gas plasma sterilizers. The
company filed for bankruptcy due to operating problems arising from
regulatory issues related to one of its products. The Fund's investment of
$2.8 million has been written down to zero. The Fund, alongside several
other institutional investors, filed a complaint in New York State Supreme
Court against the investment banks involved in the private placement, in or
around March 1999, alleging fraud and deceit, fraudulent inducement and
negligent misrepresentation. On August 10, 1999, the court dismissed the
complaint. On August 31, 2000, the Fund, along with other institutional
investors, filed a notice to appeal the court's order. More recently, the
Fund and several other investors have been named in an advisory proceeding
brought by the company's bankruptcy trustee seeking the return of monies
paid to the Fund pursuant to certain senior notes issued by the Fund. While
the Fund has written off this investment, we intend to vigorously defend
these claims.
. Cardiopulmonary Corp., Milford, CT, is a manufacturer of a smart ventilator
used in the acute and sub-acute hospital market that adapts to patient's
changing breathing patterns. The Fund's position has been written-off
pursuant to a recapitalization of the company.
<PAGE>
. P2 Holdings Corp. (formerly known as Plynetic Express), San Leandro, CA,
was a provider of rapid prototyping and rapid tooling services. The company
filed for bankruptcy in 1998. The Fund has written off its $2.8 million
investment in the company.
. Party Stores Holdings, Inc., Melville, NY, operated the Party Experience,
Paperama, and Paper Cutter retail stores and filed for bankruptcy in 1998.
The Fund has written off its $2.1 million investment in the Company.
Investments in Third-Party Investment Funds
We believe each of our fund investments have largely completed their portfolio
construction and are now in harvest mode. We continue to receive meaningful
distributions from each of these fund investments. In general, those funds
focused on venture capital have outperformed buyout-focused funds.
. Allegra Capital Partners III, LP ("Allegra") is a later-stage fund based in
New York City. Allegra invests primarily in companies in the
telecommunications, software and service industries with "Internet-driven"
strategies. The Fund has received distributions of Global Crossing common
stock from Allegra.
. Brentwood Associates Buyout Fund II, LP ("Brentwood") is a buyout and
consolidation fund based in Westwood, CA. Brentwood's strategy is to
identify industries with consolidation characteristics, develop a strategy
for implementation and recruit management to execute that strategy.
Brentwood recently sold its position in Bell Sports, leading to two cash
distributions to the Fund.
. Bruckmann, Rosser, Sherrill & Co., LP ("BRS") is a leveraged buyout fund
based in New York City. The Fund recently received distributions of
California Pizza Kitchen common stock, which went public in 2000, from BRS.
. Morgenthaler Venture Partners IV, LP ("Morgenthaler") is primarily an early
stage venture capital fund, investing largely in information technology and
healthcare companies, but also investing in buyouts of basic businesses.
The Fund has received stock distributions of Inktomi, Nortel Networks,
CheckFree Holdings, and Guidant, as well as cash distributions from
Morgenthaler.
. Sevin Rosen Fund V, LP ("Sevin Rosen") invests in early-stage technology
companies, focusing specifically on companies in communications and
eBusiness infrastructure and solutions, as well as companies with Internet-
enabled business models. The Fund has received stock distributions of Ciena
and Cisco Systems from Sevin Rosen.
. Vanguard V, LP ("Vanguard") is an early-stage fund investing in information
technology and healthcare. The Fund has received from Vanguard stock
distributions of Cisco Systems and Cobalt Networks as well as a cash
distribution related to Digital Island.
We continue to seek to maximize the value of this portfolio to our
shareholders. Despite the market turbulence, we believe there continue to be
opportunities for value creation.
Respectfully submitted,
/s/ David Fann /s/ Douglas Lindgren
David Fann Douglas Lindgren
President and Chief Executive Officer Chief Investment Officer
<PAGE>
UST Private Equity Investors Fund, Inc.
Portfolio of Investments October 31, 2000
<TABLE>
<CAPTION>
Principal Acquisition Coupon Value (Note
Amount/Shares Date## Rate/Yield 1)
------------- ----------- ---------- -----------
<C> <S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 22.24%
$7,000,000 Fannie Mae, 11/02/00 (Cost
$6,998,750)................ 6.43%* $ 6,998,750
-----------
PRIVATE INVESTMENT FUNDS #, @ -- 64.84%
Allegra Capital Partners
III, LP.................... 3,758,408
Brentwood Associates Buyout
Fund II, LP................ 1,429,668
Bruckmann, Rosser, Sherrill
& Co., LP.................. 2,258,833
Morgenthaler Venture
Partners IV, LP............ 3,441,090
Sevin Rosen Fund V, LP..... 4,979,541
Vanguard V, LP............. 4,537,126
-----------
TOTAL PRIVATE INVESTMENT
FUNDS (Cost $9,031,687).... 20,404,666
-----------
PRIVATE COMPANIES #, @ -- 10.86%
Common and Preferred Stocks -- 10.86%
Medical Devices -- 0.00%
1,590,909 AbTox, Inc., Series F...... 03/97 --
515,464 +Cardiopulmonary Corp., 11/96
Series D................... --
35,294 +Cardiopulmonary Corp., 07/98
Series F................... --
-----------
--
-----------
Semiconductors -- 5.26%
294,000 LogicVision, Inc., Series 05/97
F.......................... 1,355,722
70,588 LogicVision, Inc., Series 01/00
I.......................... 299,999
-----------
1,655,721
-----------
Specialty Retail -- 5.60%
2,608,696 +Best Friends Pet Care, 12/96-03/97
Inc., Series F............. 1,500,000
583,333 +Best Friends Pet Care, 03/98
Inc., Series G............. 175,000
583,333 +Best Friends Pet Care, 10/99
Inc., Series H............. 87,500
-----------
1,762,500
-----------
Promissory Note -- 0.00%
Medical Devices -- 0.00%
301,500 Abtox, Inc................. 03/98 12.00% --
-----------
TOTAL PRIVATE COMPANIES
(Cost $10,024,499)......... 3,418,221
-----------
PUBLIC COMPANIES @ -- 3.12%
Common Stocks -- 3.12%
Computer Software -- 0.72%
42,677 Accrue Software, Inc. ..... 197,381
7,520 #Accrue Software, Inc., 08/98
(Lockup Shares)............ 27,824
-----------
225,205
-----------
Semiconductors -- 2.40%
85,170 QuickLogic Corp............ 11/96 755,884
-----------
TOTAL PUBLIC COMPANIES
(Cost $1,189,651).......... 981,089
-----------
</TABLE>
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Portfolio of Investments October 31, 2000--(continued)
<TABLE>
<CAPTION>
Value (Note
Shares 1)
------ -----------
<C> <S> <C> <C>
INVESTMENT COMPANIES -- 3.90%
647,032 Dreyfus Treasury Cash Management Fund.......... $ 647,032
578,739 Fidelity Cash Portfolio, U.S. Treasury II...... 578,739
-----------
TOTAL INVESTMENT COMPANIES (Cost $1,225,771)... 1,225,771
-----------
TOTAL INVESTMENTS (Cost $28,470,358**)................... 104.96% 33,028,497
OTHER ASSETS & LIABILITIES (NET)......................... (4.96) (1,559,665)
------ -----------
NET ASSETS............................................... 100.00% $31,468,832
====== ===========
</TABLE>
--------
* Discount Rate.
** Aggregate cost for Federal tax and book purposes.
+ At October 31, 2000, the Fund owned 5% or more of the Company's outstanding
shares thereby making the Company an affiliate as defined by the Investment
Company Act of 1940. Total market value of affiliated securities owned at
October 31, 2000 was $1,762,500.
# Restricted as to public resale. Acquired between November 1, 1996 and
January 31, 2000. Total cost of restricted securities at October 31, 2000
aggregated $19,145,603. Total market value of restricted securities owned
at October 31, 2000 was $23,850,711 or 75.8% of net assets.
## Required disclosure for restricted securities only.
@ Non-Income Producing Security.
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Assets and Liabilities
October 31, 2000
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $28,470,358) (Note 1).............. $33,028,497
Receivable for investments sold................................ 225,071
Interest receivable............................................ 5,243
Prepaid expenses............................................... 4,716
-----------
Total Assets................................................... 33,263,527
LIABILITIES:
Incentive fee payable (Note 2)................................. 1,106,346
Deferred incentive fee payable (Note 2)........................ 455,814
Management fees payable (Note 2)............................... 64,155
Directors' fees payable (Note 2)............................... 66,689
Administration fees payable (Note 2)........................... 14,567
Accrued expenses and other payables............................ 87,124
-----------
Total Liabilities.............................................. 1,794,695
-----------
NET ASSETS...................................................... $31,468,832
===========
NET ASSETS consist of:
Undistributed net investment income............................ $ 696,749
Accumulated net realized loss on investments................... (704,632)
Net unrealized appreciation of investments..................... 4,558,139
Allowance for management incentive fee......................... (1,562,160)
Par value...................................................... 405
Paid-in capital in excess of par value......................... 28,480,331
-----------
Total Net Assets................................................ $31,468,832
===========
Shares of Common Stock Outstanding ($0.01 par value, 100,000
authorized)..................................................... 40,463
NET ASSET VALUE PER SHARE....................................... $ 777.72
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Operations
For the Year Ended October 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income............................................... $ 510,857
-----------
EXPENSES:
Managing investment advisory fees (Note 2).................... 448,241
Directors' fees and expenses (Note 2)......................... 66,689
Administration fees (Note 2).................................. 58,000
Legal fees.................................................... 57,800
Audit fees.................................................... 33,199
Miscellaneous expenses........................................ 32,286
-----------
Total Expenses................................................ 696,215
Expenses reimbursed by Managing Investment Adviser (Note 2)... (135,394)
-----------
Net Expenses.................................................. 560,821
-----------
NET INVESTMENT LOSS............................................ (49,964)
-----------
NET REALIZED AND UNREALIZED GAIN: (Note 1)
Net realized gain on investments.............................. 11,935,543
Net change in unrealized appreciation of investments.......... 1,408,532
-----------
NET REALIZED AND UNREALIZED GAIN............................... 13,344,075
-----------
Net change in allowance for management incentive fee........... (1,334,408)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $11,959,703
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
2000 1999
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment loss.............................. $ (49,964) $ (236,810)
Net realized gain (loss) on investments.......... 11,935,543 (2,449,598)
Net change in unrealized appreciation of
investments...................................... 1,408,532 5,669,810
Net change in allowance for management incentive
fee.............................................. (1,334,408) (227,752)
----------- -----------
Net increase in net assets resulting from
operations....................................... 11,959,703 2,755,650
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gain................................ (11,207,656) (367,573)
In excess of net realized gain................... (704,632) --
Paid-in capital.................................. (8,873,852) --
----------- -----------
Total Distributions.............................. (20,786,140) (367,573)
----------- -----------
Net increase (decrease) in net assets............. (8,826,437) 2,388,077
NET ASSETS:
Beginning of year................................ 40,295,269 37,907,192
----------- -----------
End of year (including undistributed net
investment income of $696,749 and $565,764,
respectively).................................... $31,468,832 $40,295,269
=========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Statement of Cash Flows
For the Year Ended October 31, 2000
<TABLE>
<S> <C>
CASH FLOWS FROM INVESTING AND OPERATING ACTIVITIES:
Proceeds from Sales of Investments............................. $23,050,959
Purchases of Investments....................................... (1,699,403)
Net Decrease in Short-Term Investments......................... 6,380,398
Investment Income.............................................. 616,072
Interest Paid.................................................. (5,315)
Operating Expenses Paid........................................ (565,626)
-----------
Net Cash Provided for Investing and Operating Activities....... 27,777,085
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions Paid............................................. (20,786,140)
Cash Paid on Borrowings........................................ (7,000,000)
Other.......................................................... 4,062
-----------
Net Cash Used by Financing Activities.......................... (27,782,078)
-----------
Net Decrease in Cash........................................... (4,993)
Cash at Beginning of Year....................................... 4,993
-----------
Cash at End of Year............................................. $ --
===========
Reconciliation of Net Investment Loss to Net Cash Used for
Investing and Operating Activities:
Net Investment Loss............................................ $ (49,964)
Proceeds from Sales of Investments............................. 23,050,959
Purchases of Investments....................................... (1,699,403)
Net Decrease in Short-Term Investments......................... 6,380,398
Net Decrease in Receivables Related to Operations.............. 109,038
Net Decrease in Payables Related to Operations................. (336,321)
Accretion/Amortization of Discounts and Premiums............... 322,378
-----------
Net Cash Provided for Investing and Operating Activities....... $27,777,085
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
UST Private Equity Investors Fund, Inc.
Financial Highlights--Selected Per Share Data and Ratios
For a Fund share outstanding throughout each period
<TABLE>
<CAPTION>
Year Ended October 31,
2000 1999 1998 1997 1996
------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD................. $995.85 $936.84 $1,165.99 $1,055.77 $ 992.32
------- ------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net Investment Income
(Loss)................... (1.23) (5.85) (3.97) 5.35 40.33
Net Realized and
Unrealized Gain (Loss) on
Investments.............. 329.79 79.57 (181.64) 144.20 32.84
Net Change in Allowance
for Management Incentive
fee...................... (32.98) (5.63) 3.01 (2.91) (0.10)
------- ------- --------- --------- ---------
Total from Investment
Operations............... 295.58 68.09 (182.60) 146.64 73.07
------- ------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income.... -- -- -- (35.34) (9.62)
Net Realized Gain........ (276.99) (9.08) (46.55) (1.08) --
In Excess of Net Realized
Gain..................... (17.41) -- -- -- --
Paid-in Capital.......... (219.31) -- -- -- --
------- ------- --------- --------- ---------
Total Distributions...... (513.71) (9.08) (46.55) (36.42) (9.62)
------- ------- --------- --------- ---------
NET ASSET VALUE, END OF
PERIOD.................... $777.72 $995.85 $ 936.84 $1,165.99 $1,055.77
======= ======= ========= ========= =========
TOTAL NET ASSET VALUE
RETURN+................... 35.41% 7.33% (16.22)% 14.37% 7.41%
======= ======= ========= ========= =========
RATIOS AND SUPPLEMENTAL
DATA
Net Assets, End of Period
(Thousands).............. $31,469 $40,295 $ 37,907 $ 47,179 $ 42,720
Ratio of Net Operating
Expenses to Average Net
Assets................... 1.54% 1.62% 1.77% 1.65% 1.00%
Ratio of Gross Operating
Expenses to Average Net
Assets++................. 1.92% 2.01% 1.95% 2.02% 1.56%
Ratio of Net Investment
Income (Loss) to Average
Net Assets............... (0.14)% (0.64)% (0.39)% 0.48% 3.96%
Interest Expense Ratio... 0.01% 0.04% 0.09% N/A N/A
Portfolio Turnover Rate.. 5% 10% 11% 44% 10%
</TABLE>
+ 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.
++ 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 a non-
diversified, closed-end management investment company that has elected to be
treated as a business development company under the Investment Company Act of
1940, as amended.
The following is a summary of the Fund's significant accounting policies.
Such policies are in conformity with generally accepted accounting principles
for investment companies and are consistently followed in the preparation of
the financial statements. Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
these estimates.
(a) Portfolio valuation:
The Fund values portfolio securities quarterly and at other such times,
as in the Board of Directors' view, as circumstances warrant. Investments
in securities that are traded on a recognized stock exchange or on the
national securities market are valued at the last sale price for such
securities on the valuation date. Short-term debt instruments with
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market value. Direct equity investments that are the same
class as a class of stock that is registered and publicly traded, but are
subject to regulatory holding periods or other restrictions, are valued
based upon the last sales price of the unrestricted stock on the securities
exchange on which such securities are primarily traded, less a liquidity
discount determined by the Investment Adviser. Direct equity investments
for which market quotations are not readily available are carried at fair
value as determined in good faith by the Investment Adviser after
considering certain pertinent factors, including the cost of the
investment, developments since the acquisition of the investment,
comparisons to similar publicly traded investments, subsequent purchases of
the same investment by other investors, the current financial position and
operating results of the issuer and such other factors as may be deemed
relevant. Investments in limited partnerships are carried at fair value as
determined by the Investment Adviser. In establishing the fair value of
investments in other partnerships, the Investment Adviser takes into
consideration information received from those partnerships, including their
financial statements and the fair value established by the general partner
of the investee partnership.
At October 31, 2000, market quotations were not readily available for
securities valued at $23,822,887. Such securities were valued by the
Investment Adviser, under the supervision of the Board of Directors.
Because of the inherent uncertainty of valuation, the estimated values may
differ significantly from the values that would have been used had a ready
market for the securities existed, and the differences could be material.
(b) Security transactions and investment income:
Security transactions are recorded on a trade date basis. Realized gains
and losses on investments sold are recorded on the basis of identified
cost. Interest income, adjusted for amortization of premiums and discounts
on investments, is earned from settlement date and is recorded on the
accrual basis. Dividend income is recorded on the ex-dividend date.
<PAGE>
(c) Repurchase agreements:
The Fund enters into agreements to purchase securities and to resell them
at a future date. It is the Fund's policy to take custody of securities
purchased and to ensure that the market value of the collateral including
accrued interest is sufficient to protect the Fund from losses incurred in
the event the counterparty does not repurchase the securities. If the
seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
(d) Federal income taxes:
It is the policy of the Fund to continue to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code and
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends from net investment income are declared and paid at least
annually. Any net realized capital gains, unless offset by any available
capital loss carryforward, are distributed to shareholders at least
annually. Dividends and distributions are determined in accordance with
Federal income tax regulations which may differ from generally accepted
accounting principles. These "book/tax" differences are either considered
temporary or permanent. To the extent these differences are permanent, such
amounts are reclassified within the capital accounts based on their federal
tax basis treatment; temporary differences do not require reclassification.
During the current year, permanent differences, primarily due to net
operating losses, resulted in increases in undistributed net investment
income and accumulated net realized gain on investments and a corresponding
decrease in paid-in capital. The reclassification had no effect on net
assets.
At October 31, 2000, the tax basis of the Fund's investments for Federal
income tax purposes amounted to $28,470,358. The net unrealized
appreciation amounted to $4,558,139, which is comprised of gross unrealized
appreciation of $11,642,303 and aggregate gross unrealized depreciation of
$7,084,164.
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.
U.S. Trust is a state-chartered bank and trust company and a member bank of
the Federal Reserve System and is a wholly-owned subsidiary of U.S. Trust
Corporation, a registered bank holding company. U.S. Trust Corporation is a
wholly-owned subsidiary of the Charles Schwab Corporation.
<PAGE>
Chase Global Funds Services Company ("CGFSC"), a corporate affiliate of The
Chase Manhattan Bank, (the "Administrator") provides administrative services
to the Fund. For the services provided to the Fund, the Administrator is
entitled to an annual fee of $58,000, which is paid quarterly.
U.S. Trust has voluntarily agreed to waive or reimburse other operating
expenses of the Fund, exclusive of management fees, to the extent they exceed
0.42% 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
The Fund's purchases and sales of securities, excluding short-term
investments, for the year ended October 31, 2000, aggregated $1,699,403 and
$21,312,360, respectively.
4. Transactions with Affiliated Companies
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. The Fund did not receive dividend or
interest income from affiliated companies during the period. There were no
transactions with companies which are or were affiliates during the period.
<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. (the "Fund"), including the portfolio of
investments, as of October 31, 2000, the related statement of operations and
statement of cash flows for the year then ended, the statement of changes in
net assets for each of the two years then ended and the financial highlights
for each of the indicated periods. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of October 31, 2000 by correspondence with
the custodian and brokers or other appropriate auditing procedures where
replies from brokers were not received. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides 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 the
UST Private Equity Investors Fund, Inc. at October 31, 2000, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years then ended and the financial highlights for
each of the indicated periods in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
December 15, 2000
--------------------------------------------------------------------------------
Federal Income Tax Information (Unaudited)
In order to meet certain requirements of the Internal Revenue Code we are
advising you that of the $20,786,140 distributions paid by the Fund during the
fiscal year October 31, 2000, $11,912,288 is from long-term capital gains, and
$8,873,852 is from paid-in capital.
The percentage of income earned from direct treasury obligations was 0.00%
for the Fund.
Shareholders should not use the above information to prepare their tax
returns. The information necessary to complete your income tax returns will be
included with your Form 1099 DIV, which will be sent to you separately in
January 2001.
<PAGE>
OTHER BUSINESS (UNAUDITED)
The Annual Meeting of Shareholders of the Company was held at the offices of
United States Trust Company 114 West 47th Street, New York, New York 10036 on
July 18, 2000, at 10:00 a.m. (New York time) (the "Meeting"). Of the 40,463
shares outstanding as of April 24, 2000, the record date for the Meeting,
22,961 were present or represented by proxy at the Meeting. The shareholders
of the Company approved the following matters: (i) to elect each of Mr.
Bernstein, Mr. Hover, Mr. Murphy and Mr. Imbimbo as directors of the Company,
(ii) to approve or disapprove a new investment advisory agreement among the
Company, United States Trust Company of New York and U.S. Trust Company, (iii)
to approve and ratify or disapprove and reject the payments previously made to
United States Trust Company of New York and U.S. Trust Company pursuant to the
investment advisory agreement and the Board of Directors' determinations with
respect thereto, and (iv) to ratify or reject the selection of Ernst & Young
LLP as the Company's independent auditors for the fiscal year ending October
31, 2000. The results of the voting for each of these proposals were as
follows:
1. Election of Directors:
<TABLE>
<CAPTION>
For Withheld
-------------------------------------------------------------------------------
<S> <C> <C>
John C. Hover II............................................... 22,545 416
Gene M. Bernstein.............................................. 22,545 416
Stephen V. Murphy.............................................. 22,520 441
Victor F. Imbimbo, Jr.......................................... 22,545 416
</TABLE>
2. To approve the new investment advisory agreement:
For: 22,667
Against: 267
Abstain: 27
3. To approve and ratify payments previously made to United States Trust
Company of New York and U.S. Trust Company, etc.:
For: 21,985
Against: 348
Abstain: 628
4. To ratify Ernst & Young LLP as independent auditors for the fiscal year
ending October 31, 2000:
For: 22,747
Against: 187
Abstain: 27
