ITEM 1. BUSINESS.
Overview
Excelsior Private Equity Fund II, Inc. (the “Company” or the “Fund”) is a Maryland corporation organized on March 20, 1997. The Company is a non-diversified, closed-end management investment company operating as a business development company (“BDC”) under the Investment Company Act of 1940 (“Investment Company Act”), as amended, and, in connection with its initial offering of shares, registered said offering of shares under the Securities Act of 1933, as amended. BDCs are a special type of investment company, as defined and regulated by the Investment Company Act, which focus primarily on investing in the privately issued securities of eligible portfolio companies, as defined by the Investment Company Act. A BDC must also make available significant managerial assistance to such companies. The Company’s investment objective is to achieve long-term capital appreciation by investing in private later-stage venture capital and private middle-market companies and in certain venture capital, buyout and private equity funds that the Managing Investment Adviser (defined herein) believes offer significant long-term capital appreciation.
U.S. Trust Company, N.A., acting through its registered investment advisory division, U.S. Trust Company, N.A. Asset Management Division serves with United States Trust Company of New York, acting through its registered investment advisory division, U.S. Trust - New York Asset Management Division (each an “Investment Adviser” and together, the “Managing Investment Adviser” or “U.S. Trust”) provide investment management services to the Company pursuant to a management agreement dated July 18, 2000 (the “Management Agreement”). U.S. Trust Company, N.A. and United States Trust Company of New York are each a wholly-owned subsidiary of U.S. Trust Corporation, a registered bank holding company. U.S. Trust Corporation is an indirect wholly-owned subsidiary of The Charles Schwab Corporation. All officers of the Company are employees and/or officers of the Managing Investment Adviser. The Managing Investment Adviser is responsible for performing the management and administrative services necessary for the operation of the Company.
Pursuant to a Registration Statement on Form N-2 (File No. 333-23811) which was declared effective on June 2, 1997, the Company publicly offered up to 200,000 shares of common stock at $1,000 per share. The Company held its initial and final closings on October 8, 1997 and November 19, 1997, representing over $155.5 million and $40.2 million, respectively. The Company sold a total of 195,730 shares in the public offering for gross proceeds totaling $195,730,000 (including one share purchased for $1,000 on March 20, 1997, by Douglas A. Lindgren, the Company’s Co-Chief Executive Officer and Chief Investment Officer). Shares of the Company were made available through UST Financial Services Corp. (the “Selling Agent”) to clients of U.S. Trust and its affiliates who met the Company’s investor suitability standards.
In connection with the public offering of the Company’s shares, the Managing Investment Adviser paid to the Selling Agent a commission totaling $60,000. The Company incurred offering costs associated with the public offering totaling $367,154. Net proceeds to the Company from the public offering, after offering costs, totaled $195,362,846.
The Company’s Articles of Incorporation provide that the duration of the Company will be ten years from the final closing of the sale of the shares, subject to the rights of the Managing Investment Adviser and the investors to extend the term of the Company.
The following is a summary of the Company’s investment portfolio.
INVESTMENTS HELD-PRIVATE
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ClearOrbit, Inc. (formerly known as BPA Systems, Inc.)
Description: Extends enterprise systems value with proven Supply Chain Execution (SCE) and Collaborative Supply Management (CSM) software solutions. Our unique approach allows customers to fully leverage their investment in enterprise applications. ClearOrbit customers enhance the functionality of their procurement, manufacturing and warehousing/distribution systems through the automation of internal business processes and by incorporating their trading partners into extended supply chain execution processes.
2004 Activity: 2004 was ClearOrbit’s tenth year in operation. License revenues, maintenance renewals, new customer acquisition and new product launches all increased for the year; in particular, software license revenues were up over seventy percent over the fiscal year ending June 30, 2003. In addition, the company standardized its technology on the J2EE platform, which is consistent with how enterprise customers are developing new software applications.
Investment: The Fund originally invested $5 million in ClearOrbit, and the investment is currently being held at a cost of $5.0 million.
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Metrigen, Inc.
Description: A pioneer in the commercial oligo synthesis field and has purchased or licensed more than 45 patents in the field of pico-scale synthesis and related applications. Metrigen was founded by a group of professionals from Operon, Stanford, and Protogene.
2004 Activity: Metrigen launched a Web site with pricing in November 2004 and began receiving online orders. Metrigen believes that its early customers are at the “cusp” of the new “Synthetic Biology” industry. In addition, Metrigen received notice that its long DNA synthesis (Gene Synthesis) patent is pending issue. This patent covers gene synthesis with oligos that have been removed from a microarray, as well as microarrays that are used for gene synthesis.
Investment: In December 2002, Protogene Laboratories, Inc., a former Fund portfolio company investment, negotiated a transaction in which it sold substantially all of its assets. In exchange for its Protogene ownership, the Fund received $0.1 million in cash, a $0.5 million promissory note and warrants in Metrigen, Inc. The investment is currently valued at $.05 million.
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Mosaica Education, Inc. (formerly known as Advantage Schools, Inc.)
Description: For-profit provider of public school education management services. The Company’s schools are publicly-funded, receiving per-student capitalization rates generally consistent with those received by other schools in the district.
2004 Activity: Mosaica is currently operating 27 charter schools in Michigan, Cloriado, Arizona and Washington, D.C. The academic performance of its students continues to be strong relative to comparable public school demographics (geography, socioeconomics, etc.)
Investment: The Fund invested in Advantage Schools, Inc., which manages charter schools in troubled urban school districts in cooperation with local partners. The Fund originally invested $7.1 million in Advantage Schools. In August 2001, Mosaica Education, Inc. a privately held operator of charter schools acquired Advantage, forming Mosaica Advantage. The Fund received 75,059 shares of preferred stock in Mosaica Education, Inc. and promissory notes in the principal amount of $2.0 million from the acquisition of Advantage. As of October 31, 2004, the investment was valued at $5.5 million.
INVESTMENTS HELD-THIRD-PARTY INVESTMENT FUNDS
Advanced Technology Ventures V, LP (“ATV”) is an early-stage focused fund targeting information technology and health care markets. ATV has drawn all of the Fund’s $3 million commitment. At October 31, 2004, the total value (fair market value plus distributions) of this investment was $1.0 million.
Brand Equity Ventures I, LP (“Brand Equity”) is focused on investing broadly across the consumer sector, particularly in branded opportunities within e-commerce, retailing, and direct response markets. Brand Equity has drawn all of the Fund’s $2.5 million commitment. At October 31, 2004, the total value (fair market value plus distributions) of this investment was $1.3 million.
Brentwood Associates III, LP (“Brentwood”) is focused on middle-market buyouts and consolidations. Brentwood’s strategy is to identify industries with consolidation characteristics, develop a strategy for implementation and recruit management to execute that strategy. Brentwood has drawn all of the Fund’s $5 million commitment. At October 31, 2004, the total value (fair market value plus distributions) of this investment was $5.7 million.
Broadview Capital Partners, LP (“Broadview”) is focused on buyouts, recapitalizations and growth financings within the technology sector. Broadview has drawn all of the Fund’s $5 million commitment. At October 31, 2004, the total value (fair market value plus distributions) of this investment was $3.1 million.
Commonwealth Capital Ventures II, LP (“Commonwealth”) invests in early to later-stage information technology companies in the New England region. Commonwealth maintains a particular focus on communications technology, Internet software and services, and e-commerce companies. Commonwealth has drawn all of the Fund’s $4 million commitment. At October 31, 2004, the total value (fair market value plus distributions) of this investment was $3.5 million.
Communications Ventures III, LP (“CommVentures”) targets early-stage companies exclusively in the communications sector. CommVentures has drawn all of the Fund’s $5 million commitment. At October 31, 2004 the total value (fair market value plus distributions) of this investment was $1.3 million.
Friedman, Fleischer & Lowe, LP (“Friedman”) is a fund focused exclusively on participation in middle-market buyouts. Friedman distributed a return of capital to the Fund in January 2001. Friedman has drawn all of the Fund’s $5 million commitment. At October 31, 2004, the total value (fair market value plus distributions) of this investment was $11.4 million.
Mayfield X, LP (“Mayfield”) invests in early-stage information technology and healthcare companies, primarily located in Silicon Valley. Mayfield has drawn all of the Fund’s $5 million commitment. At October 31, 2004, the total value (fair market value plus distributions) of this investment was $1.0 million.
Mayfield X Annex, LP (“Annex Fund”) invests follow-on capital in select Mayfield portfolio companies. The Annex Fund has drawn all of the Fund’s $250,000 commitment. As of October 31, 2004, the total value (fair market value plus distributions) of this investment was $0.2 million.
Mid-Atlantic Venture Fund III, LP (“MAVF”) invests in early and expansion-stage companies throughout the Mid- Atlantic region of the United States. MAVF has drawn all of the Fund’s $5 million commitment. As of October 31, 2004, the total value (fair market value plus distributions) of this investment was $2.0 million.
Morgenthaler Venture Partners V, LP (“Morgenthaler”) is primarily an early-stage venture fund, investing largely in information technology and healthcare companies but also invests in buyouts of basic businesses. Morgenthaler has drawn all of the Fund’s $8 million commitment. As of October 31, 2004, the total value (fair market value plus distributions) of this investment was $5.5 million.
Quad-C Partners V, LP (“Quad C”) is focused on taking controlling positions in leveraged acquisitions and recapitalizations of middle-market companies. Quad C has drawn all of the Fund’s $5 million commitment. As of October 31, 2004, the total value (fair market value plus distributions) of this investment was $7.3 million.
Sevin Rosen Fund VI, LP (“Sevin Rosen”) invests in early-stage technology companies, focusing specifically on companies in communications and eBusiness infrastructure and solutions, as well as those companies with Internet-enabled business models. Sevin Rosen has drawn all of the Fund’s $2.5 million commitment. As of October 31, 2004, the total value (fair market value plus distributions) of this investment was $4.7 million.
Trinity Ventures VI, LP (“Trinity”) is an early to later-stage fund, which invests in the software, communications and electronic commerce sectors. Trinity has drawn all of the Fund’s $3 million commitment. As of October 31, 2004, the total value (fair market value plus distributions) of this investment was $2.4 million.
For additional information concerning the Company’s investments see the financial statements beginning on page 11 of this report.
Competition
The Company encounters competition from other entities and individuals having similar investment objectives. Primary competition for desirable investments comes from investment partnerships, venture capital affiliates of large industrial and financial companies, investment companies and wealthy individuals. Some of the competing entities and individuals have investment managers or advisers with greater experience, resources and managerial capabilities than the Company and may therefore be in a stronger position than the Company to obtain access to attractive investments. To the extent that the Company can compete for such investments, it may not be able to do so on terms as favorable as those obtained by larger, more established investors.
Employees
At October 31, 2004, the Company had no full-time employees. All personnel of the Company are employed by and compensated by the Managing Investment Adviser pursuant to the Management Agreement.
ITEM 2.
ITEM 2. PROPERTIES.
The Company does not own or lease any physical properties.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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 at 10:00 a.m. (New York time) on March 26, 2004 (the “Meeting”). Of the 195,730 shares outstanding as of January 30, 2004, the record date for the Meeting, 113,847 were present or represented by proxy at the Meeting. The shareholders of the Company approved the following matter: to elect each of Mr. Hover, Mr. Bernstein, Mr. Murphy and Mr. Imbimbo as Directors of the Company. The results of the voting for this proposal were as follows:
1. Election of Directors:
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information
The Company has 200,000 authorized shares. As of December 31, 2004, 195,730 shares were issued and outstanding. There is no established public trading market for the Company’s shares.
Holders
There were 2,167 holders of the Company’s shares as of December 31, 2004.
Dividends and Distributions
Fiscal Year Ended October 31, 2004. There were no dividends or distributions paid during fiscal year 2004.
Fiscal Year Ended October 31, 2003. On October 30, 2003, the Company paid a distribution of $65.00 per share of return of capital.
For additional information concerning the payment of dividends, see “Significant Accounting Policies” in the notes to the financial statements of the Company included in Item 8 hereof.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
($ in 000’s except for per share data)
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
The Company has focused its investments in the private equity securities of expansion and later-stage venture capital companies and middle-market companies that the Company believes offer significant long-term capital appreciation. The Company may offer managerial assistance to certain of these companies. The Company invests its available cash in short-term investments pending distributions to shareholders or to provide the liquidity necessary to make portfolio investments as investment opportunities arise.
At October 31, 2004, the Company held $328,296 in cash and $13,051,488 in short-term investments as compared to $2,852,110 in cash and $1,887,983 in short-term investments at October 31, 2003. The change in cash and short-term investments from October 31, 2003 was primarily the result of proceeds received from (i) sales of Curon Medical, Inc. common shares, and (ii) cash distributions received from the Company’s private investment funds. Subsequent to the fiscal year ended October 31, 2004, on December, 9, 2004, the Company paid a dividend of $11,761,416, or $60.09 per share, to shareholders of record as of December 6, 2004. In connection with the Company’s commitments to private investment funds, a total of $58,250,000 has been contributed by the Company through October 31, 2004. The Company has no additional capital commitment obligations to the private investment funds. The Company made no follow-on investments in its private company investments during the fiscal year ended October 31, 2004.
The Company believes that its liquidity and capital resources are adequate to satisfy its operational needs.
Results of Operations
Investment Income and Expenses
For the fiscal year ended October 31, 2004, the Company had investment income of $182,061 and net operating expenses, net of expenses reimbursed by the Managing Investment Adviser, of $800,665, resulting in a net investment loss of ($618,604). For the fiscal year ended October 31, 2003, the Company had investment income of $239,388 and operating expenses, net of expenses reimbursed by the Managing Investment Adviser, of $860,783, resulting in a net investment loss of ($621,395). For the fiscal year ended October 31, 2002, the Company had investment income of $1,477,513 and operating expenses, net of expenses reimbursed by the Managing Investment Adviser, of $1,505,909, resulting in a net investment loss of ($28,396). The Company’s investment income was down from the fiscal year ended October 31, 2003 to the fiscal year ended October 31, 2004 due to lower balances of interest-bearing short-term securities. The reduced level of the Company’s investment income from the fiscal year ended October 31, 2002 to the fiscal year ended October 31, 2003 is due primarily to declining balances of interest-bearing short-term securities resulting from the investments in the private investment funds, as well as distributions to shareholders. During the fiscal year ended October 31, 2002, the Company maintained larger balances in short-term securities due to the sale of several of its public positions and merger proceeds received from one private company investment. Proceeds from the sale of these securities and distributions received from private investment funds were part of a distribution paid to shareholders on October 31, 2002.
Because the Company is in the process of harvesting its portfolio investments and distributing proceeds, there is a trend toward a reduced level of net assets that would result in reinvestment in interest-bearing investments and therefore, a decrease in interest income. During the fiscal year ended October 31, 2002, however, there was an increase in investment income over fiscal 2001 because the Company received redemption proceeds on its Cardiac Science, Inc. senior secured notes. The reinvestment of sales proceeds in interest-bearing securities, as well as interest earned on the senior secured notes, contributed to an increase in interest income over the previous year. The decrease in net operating expenses from fiscal year 2002 through fiscal year 2004 is primarily attributable to the decrease in managing investment adviser fees as a result of the decline in the net assets upon which fees are charged.
The Managing Investment Adviser provides investment management and administrative services required for the operation of the Company. In consideration of the services rendered by the Managing Investment Adviser, the Company pays a management fee based upon a percentage of the net assets of the Company invested or committed to be invested in certain types of investments and an incentive fee based in part on a percentage of realized capital gains of the Company. The management fee is determined and payable quarterly. For the fiscal years ended October 31, 2004, 2003 and 2002, the Managing Investment Adviser earned $673,403, $721,837, and $1,214,443 in management fees, respectively. The decrease in the fees earned by the Managing Investment Adviser over time can be attributed to the decrease in the Company’s net assets. The Managing Investment Adviser has voluntarily agreed to waive or reimburse other operating expenses of the Company, exclusive of management fees, to the extent they exceed 0.25% of the Company’s average net assets. During fiscal years ended October 31, 2004, 2003 and 2002, respectively, the Managing Investment Adviser reimbursed other operating expenses of the Company, in the amount of $223,870, $322,717, and $243,246 as a result of expenses incurred in excess of those permitted pursuant to the Company’s prospectus. This reimbursement has increased from fiscal 2002 to fiscal 2003 as a result of the decrease in net assets, and therefore, a reduced threshold upon which to calculate the maximum allowable expenses. In fiscal 2004, the reimbursement decreased as a result of an increase in the maximum allowable expenses as well as a reduction in other operating expenses. With the exception of legal fees, the Company’s other operating expenses tend to be more fixed in nature. In addition, for the fiscal year ended October 31, 2002, the change in allowance for the management incentive fee was $1,356,372, resulting in receivable to the Company. The Company received payment of the management fee receivables of $1,356,372 during the fiscal year ended October 31, 2003. As of October 31, 2004 and October 31, 2003, there was no incentive fee receivable from the Managing Investment Adviser or payable by the Company.
Net Assets
For the fiscal year ended October 31, 2004, the Company’s net assets were $51,717,554, or a net asset value per common share of $264.23. This represents an increase of $2,001,366, or $10.23 per share, from net assets of $49,716,188, or a net asset value per common share of $254.00, at October 31, 2003. The increase was driven by an increase in unrealized appreciation of $6,889,598, or $35.20 per share, principally from the Company’s private investment funds. This was offset by a decresase in net assets resulting from a realized loss on investments in the amount of ($4,269,628), or ($21.81) per share, primarily from the Company’s sale of Curon Medical, Inc. and operating expenses exceeding investment income by ($618,604), or ($3.16) per share.
For the fiscal year ended October 31, 2003, the Company’s net assets were $49,716,188, or a net asset value per common share of $254.00. This represents a decrease of ($7,967,654), or ($40.71) per share, from net assets of $57,683,842, or a net asset value per common share of $294.71, at October 31, 2002. The decline is a combination of a return of capital distribution of ($12,722,250) or ($65.00) per share paid to shareholders on October 30, 2003, partially offset by an increase resulting from investment income and net gain on investments exceeding operating expenses by $4,754,796 or $24.29 per share. This net operating increase is comprised primarily of: 1) net realized loss on portfolio transactions totaling ($13,516,857) and 2) total net unrealized gain on portfolio investments in the amount of $18,893,048, totaling $5,376,191 or $27.46 per share.
Realized and Unrealized Gains and Losses from Portfolio Investments
For the fiscal year ended October 31, 2004, the Company had a net realized loss on security transactions of ($4,269,628) and a net change in unrealized appreciation on investments of $6,889,598. The net realized loss for the fiscal year was primarily the result of the sale of the Company’s shares of Curon Medical, Inc. common stock. The net change in unrealized appreciation for the fiscal year ended October 31, 2004 was principally the result of increases in the valuations of the Company’s private invetment funds.
For the fiscal year ended October 31, 2003, the Company had a net realized loss on security transactions of ($13,516,857) and a net change in unrealized appreciation/(depreciation) on investments of $18,893,048. The net realized loss for the fiscal year was primarily the result of (i) the conclusion of the assignment for the benefit of creditors of ReleaseNow, Inc., resulting in a realized loss of ($7,890,854). ReleaseNow, Inc. a private company investment, transferred ownership of its assets for liquidation; the liquidation concluded and the Company received $65,850 as a pro rata distribution of claims against the assets, and (ii) the acquisition of the assets of Protogene Laboratories, Inc. by Metrigen, Inc., resulting in a realized loss of ($7,262,497). The Company, in concluding its sale of shares of common stock of Cardiac Science, Inc. and Concur Technologies, Inc., also recorded realized gains of $538,331 and $1,099,061 during the period, respectively.
The net change in unrealized appreciation for the fiscal year ended October 31, 2003 was principally the result of a reclassification of ReleaseNow, Inc. and Protogene Laboratories, Inc. from unrealized depreciation to realized loss, thereby increasing unrealized appreciation/(depreciation). In addition to these increases, the Company’s position in Curon Medical, Inc. increased in value by $3,314,474.
For the fiscal year ended October 31, 2002, the Company had a ($31,468,519) net realized and unrealized loss from investments, comprised of a ($9,382,815) net realized loss on investments and a ($22,085,704) net change in unrealized depreciation of investments as compared to a ($132,793,435) net realized and unrealized loss from investments, comprised of a ($9,042,377) net realized loss on investments and a ($123,751,058) net change in unrealized depreciation on investments for the fiscal year ended October 31, 2001. The net unrealized depreciation on investments for the fiscal year ended October 31, 2002 is primarily the result of depreciation on a number of the Company’s private investment funds as well as write-downs taken during the year on MarketFirst Software, Inc. (aka Pivotal Corporation) and Captura Software, Inc. (aka Concur Technologies, Inc.). The net realized loss on investments for the fiscal year ended October 31, 2002 is the result of the sales/mergers of several companies collectively. The Company shares in PowerSmart, Inc., a private company, were sold as part of a merger agreement between PowerSmart, Inc. and Microchip Technology, Inc. The Company also sold the majority of its holding of Cardiac Science, Inc., a public company, at a gain. On the other hand, the Company sold its shares in Cross Media Marketing Corp., a public company, at a loss and recorded realized losses on Concur Technologies, Inc. and Pivotal Corporation due to merger transactions.
Application of Critical Accounting Policies
Under the supervision of the Company’s Valuation and Audit Committees, consisting of the independent directors of the Company, the Managing Investment Adviser makes certain critical accounting estimates with respect to the valuation of private portfolio investments. These estimates could have a material impact on the presentation of the Company’s financial condition because in total, they currently represent 74.1% of the Company’s net assets at October 31, 2004. For the private investments held at October 31, 2004 changes to these estimates, i.e. changes in the valuations of these private investments, resulted in a $5.0 million increase in net asset value.
The value for securities for which no public market exists is difficult to determine. Generally speaking, such investments will be valued on a “going concern” basis without giving effect to any disposition costs. There is a range of values that is reasonable for such investments at any particular time. 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.
Initially, direct private company investments are valued based upon their original cost until developments provide a sufficient basis for use of a valuation other than cost. Upon the occurrence of developments providing a sufficient basis for a change in valuation, direct private company investments will be valued by the “private market” or “appraisal” methods of valuation. The private market method shall only be used with respect to reliable third party transactions by sophisticated, independent investors. The appraisal method shall be based upon such factors affecting the company such as earnings, net worth, reliable private sale prices of the company’s securities, the market prices for similar securities of comparable companies, an assessment of the company’s future prospects or, if appropriate, liquidation value. The values for the investments referred to in this paragraph will be estimated regularly by the Managing Investment Adviser or a committee of the Board, both under the supervision of the Board, and, in any event, not less frequently than quarterly. However, there can be no assurance that such value will represent the return that might ultimately be realized by the Company from the investments.
The valuation of the Company’s private funds is based upon its pro-rata share of the value of the assets of a private fund as determined by such private fund, in accordance with its partnership agreement, constitutional or other documents governing such valuation, on the valuation date. If such valuation with respect to the Company’s investments in private funds is not available by reason of timing or other event on the valuation date, or are deemed to be unreliable by the Managing Investment Adviser, the Managing Investment Adviser, under supervision of the Board, shall determine such value based on its judgment of fair value on the appropriate date, less applicable charges, if any.
The Managing Investment Adviser also makes estimates regarding discounts on market prices of publicly traded securities where appropriate. For securities which have legal, contractual or practical restrictions on transfer, a discount of 10% to 40% from the public market price will be applied.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The following discussion includes forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.
Equity Price Risk
A majority of the Company’s investment portfolio consists of equity securities in private companies and private investment funds, representing 74.1% of the Company’s net assets, which are not publicly traded. These investments are recorded at fair value as determined by the Managing Investment Adviser in accordance with valuation guidelines adopted by the Board of Directors. This method of valuation does not result in increases or decreases in the fair value of these equity securities in response to changes in market prices. Thus, these equity securities are not subject to equity price risk normally associated with public equity markets. Nevertheless, the Company was exposed to equity price risk through its investment in the equity securities of one public company, Curon Medical, Inc. (NASDAQ: CURN) at October 31, 2003. At October 31, 2003, this publicly traded equity security was valued at $4,243,099, representing 8.5% of the net assets. Thus, there is exposure to equity price risk, estimated as the potential loss in fair value due to a hypothetical 10% decrease in quoted market prices, representing a decrease in the value of these securities of $424,309. In July and August, 2004, the Company liquidated all of its shares of Curon Medical Inc. common stock and therefore, at October 31, 2004, the Company was not subject to equity price risk normally associated with public equity markets, except to the extent that the private investment funds that the Company has invested in has, from time to time, interests in securities which may be publicly traded.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
Portfolios of Investments at October 31, 2004 and October 31, 2003
Statements of Assets and Liabilities at October 31, 2004 and October 31, 2003
Statements of Operations for the years ended October 31, 2004, October 31, 2003 and October 31, 2002
Statements of Changes in Net Assets for the years ended October 31, 2004, October 31, 2003 and October 31, 2002
Statements of Cash Flows for the years ended October 31, 2004, October 31, 2003 and October 31, 2002
Financial Highlights - Selected Per Share Data and Ratios for the years ended October 31, 2004, October 31, 2003, October 31, 2002, October 31, 2001 and October 31, 2000
Notes to Financial Statements
Note - All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or the notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Excelsior Private Equity Fund II, Inc.
We have audited the accompanying statement of assets and liabilities of Excelsior Private Equity Fund II, Inc. (the “Fund”), including the portfolio of investments, as of October 31, 2004 and 2003, and the related statements of operations, cash flows, changes in net assets and financial highlights for each of the years then ended. 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. The statements of operations, changes in net assets and cash flows for the year ended October 31, 2002 and the financial highlights for each of the years in the three year period ended October 31, 2002 were audited by other auditors whose report, dated December 17, 2002, expressed an unqualified opinion on such statements and financial highlights.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2004 and 2003, by correspondence with the custodian and the management of the private investment funds; where replies were not received for the private investment funds, we performed other auditing procedures. 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.
As discussed in Note 1(a), the financial statements include investment securities valued at $38,327,198 and $40,786,051 as of October 31, 2004 and 2003, respectively, representing 74.11% and 82.04%, respectively, of net assets, whose values have been estimated by the Managing Investment Advisor, under the supervision of the Board of Directors, in the absence of readily ascertainable market values. We have reviewed the procedures used by the Managing Investment Advisor in preparing the valuations of investment securities and have inspected the underlying documentation, and in the circumstances we believe the procedures are reasonable and the documentation appropriate. However, in the case of those securities with no readily ascertainable market value, because of the inherent uncertainty of valuation, the Managing Investment Advisor’s estimate of values may differ significantly from the values that would have been used had a ready market existed for the securities and the differences could be material.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Excelsior Private Equity Fund II, Inc. as of October 31, 2004 and 2003, the results of its operations, its cash flows, changes in its net assets and the financial highlights for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
New York, New York
December 28, 2004
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2004
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2004 - (continued)
 At October 31, 2004, the Company owned 5% or more of the company’s outstanding voting 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, 2004 was $12,185,944.
# Restricted as to public resale. Acquired between March 1, 1998 and October 31, 2003. Total cost of restricted securities at October 31, 2004 aggregated $71,598,959. Total value of restricted securities owned at October 31, 2004 was $38,327,198 or 74.11% of net assets.
@ Non-income producing security.
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2003
Excelsior Private Equity Fund II, Inc.
Portfolio of Investments October 31, 2003 - (continued)
 At October 31, 2003, the Company owned 5% or more of the company’s outstanding voting 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, 2003 was $18,448,663.
# Restricted as to public resale. Acquired between March 1, 1998 and October 31, 2002. Total cost of restricted securities at October 31, 2003 aggregated $85,190,509. Total value of restricted securities owned at October 31, 2003 was $45,029,150 or 90.57% of net assets.
## Required disclosure for restricted securities only.
@ Non-income producing security.
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statements of Assets and Liabilities
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statements of Operations
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statements of Changes in Net Assets
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Statements of Cash Flows
Notes to Financial Statements are an integral part of these Financial Statements.
Excelsior Private Equity Fund II, Inc.
Financial Highlights - Selected Per Share Data and Ratios
Per Share Operating Performance (1)
(1) For a share outstanding throughout each year.
(2) 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 Company during the year, and assumes dividends and distributions, if any, were reinvested. The Company’s shares were issued in a private placement and are not traded. Therefore, market value total investment return is not calculated.
(3) Expense ratio before waiver of fees and reimbursement of expenses by the Managing Investment Adviser (see Note 2). See Note 7 regarding additional reimbursements during the year ended October 31, 2004.
Notes to Financial Statements are an integral part of these Financial Statements.
EXCELSIOR PRIVATE EQUITY FUND II, INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2004
Note 1 - Significant Accounting Policies
Excelsior Private Equity Fund II, Inc. (the “Company”) was incorporated under the laws of the State of Maryland on March 20, 1997, and is a non-diversified, closed-end management investment company that has elected to be treated as a business development company or “BDC” under the Investment Company Act of 1940, as amended. As a BDC, the Company must be primarily engaged in the business of furnishing capital and making available managerial assistance to companies that generally do not have ready access to capital through conventional financial channels. The Company’s investment objective is to achieve long-term capital appreciation primarily by investing in private later-stage venture capital companies and private middle-market companies in which the equity is closely held by company founders, management and/or a limited number of institutional investors and, to a lesser extent, privately offered venture capital, buyout and private equity funds managed by third parties which have attractive investment return prospects and offer compelling strategic benefits to the Company. The Company does not have the right to demand that such any investee securities be registered. The following is a summary of the Company’s significant accounting policies. Such policies are in conformity with generally accepted accounting principles in the United States for investment companies and are consistently followed in the preparation of the financial statements. Generally accepted accounting principles in the United States 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 Company values portfolio securities quarterly and at such other times as, in the Board of Directors’ view, circumstances warrant. Investments in securities for which market quotations are readily available generally will be valued at the last sale price on the date of valuation or, if no sale occurred, at the mean of the latest bid and ask prices; provided that, as to such securities that may have legal, contractual or practical restrictions on transfer, a discount of 10% to 40% from the public market price will be applied. Securities for which no public market exists and other assets will be valued at fair value as determined in good faith by the Managing Investment Adviser (as defined below) or a committee of the Board of Directors or both under the supervision of the Board of Directors pursuant to certain valuation procedures summarized below. Securities having remaining maturities of 60 days or less from the date of purchase are valued at amortized cost.
The value for securities for which no public market exists is difficult to determine. Generally, such investments will be valued on a “going concern” basis without giving effect to any disposition costs. There is a range of values that is reasonable for such investments at any particular time. Initially, direct investments are valued based upon their original cost, until developments provide a sufficient basis for use of a valuation other than cost. Upon the occurrence of developments providing a sufficient basis for a change in valuation, direct investments will be valued by the “private market” or “appraisal” methods of valuation. The private market method shall only be used with respect to reliable third party transactions by sophisticated, independent investors. The appraisal method shall be based upon such factors affecting the investee such as earnings, net worth, reliable private sale prices of the investee’s securities, the market prices for similar securities of comparable companies, an assessment of the investee’s future prospects or, if appropriate, liquidation value. The values for the investments referred to in this paragraph will be estimated regularly by the Managing Investment Adviser or a committee of the Board of Directors under the supervision of the Board of Directors and, in any event, not less frequently than quarterly. However, there can be no assurance that such values will represent the return that might ultimately be realized by the Company from the investments.
The valuation of the Company’s Private Investment Funds is based upon its pro-rata share of the value of the net assets of a Private Investment Fund as determined by such Private Investment Fund, in accordance with its partnership agreement, constitutional or other documents governing such valuation, on the valuation date. If such valuation with respect to the
Company’s investments in Private Investment Funds is not available by reason of timing or other event on the valuation date, or are deemed to be unreliable by the Managing Investment Adviser, the Managing Investment Adviser, under the supervision of the Board of Directors, shall determine such value based on its judgment of fair value on the appropriate date, less applicable charges, if any. The valuation of the Company’s Private Investment Funds also includes contributions to such Private Investment Funds made in advance of remaining capital commitments being called by the Private Investment Funds’ respective general partners. At October 31, 2004, and October 31, 2003 these contributions paid in advanced totaled $2,134,459 and $4,679,968.
At October 31, 2004 and October 31, 2003 market quotations were not readily available for the Company’s securities valued at $38,327,198 or 74.11% and 40,786,051or 82.04% of the Company’s net assets. Such securities were valued by the Managing 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.
(c) Repurchase agreements:
The Company enters into agreements to purchase securities and to resell them at a future date. It is the Company’s policy to take receipt of securities purchased and to ensure that the market value of the collateral including accrued interest is sufficient to protect the Company from losses incurred in the event the counterparty does not repurchase the securities. If the counterparty 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 Company may be delayed or limited.
(d) Federal income taxes:
It is the policy of the Company 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 carryforwards, are distributed to shareholders at least annually. Dividends and distributions are determined in accordance with federal income tax regulations that may differ from generally accepted accounting principles. These “book/tax” differences are either considered temporary or permanent and may be reclassified within the capital accounts based on their federal tax basis treatment.
The Company has unused capital loss carryforwards of approximately $46,650,580 available for income tax purposes, to be applied against future net realized gains, if any, after October 31, 2004. If not applied, $8,602,181 of the carryover will expire in 2009, $13,721,421 will expire in 2010, $18,471,137 will expire in 2011, and $5,855,841will expire in 2012.
The tax character of distributions paid may differ from the character of distributions shown on the statement of changes in net assets due to tax treatment of certain distributions. The tax character of distributions paid during the fiscal years ended October 31, 2004 and 2003 were as follows:
The cost of the Private Investment Funds for federal tax purposes is based on amounts reported to the Company on Schedule K-1 from the Private Investment Funds. As of October 31, 2004 the Company has not received information to determine the tax cost of the Private Investment Funds as of October 31, 2004. At December 31, 2003, the Private Investment Funds had a cost basis for tax purposes of $33,780,628. Based on the values of the Private Investment Funds at October 31, 2004, and after adjustment for purchases and sales between December 31, 2003 and October 31, 2004, this results in net depreciation at October 31, 2004 of $584,209, consisting of gross appreciation of $9,216,978 and gross depreciation of $9,801,187. The cost of all other investments for federal tax purposes is $39,007,592 and those investments had a tax basis net unrealized depreciation of $14,998,357, consisting of gross appreciation of $13 and gross depreciation of $14,998,370. There is no appreciation or depreciation for tax purposes on the Money Market Instruments or Investment Companies. The cost of investments other than Private Investment Funds for federal tax purposes at October 31, 2003, was $33,968,231 and those investments had a tax basis net of unrealized depreciation of $16,879,402, consisting of gross appreciation of $13 and gross depreciation of $16,879,415.
Note 2 - Investment Advisory Fee, Administration Fee and Related Party Transactions
Prior to June 1, 2003, and pursuant to an Investment Management Agreement (“Agreement”), United States Trust Company of New York (“U.S. Trust NY”) and U.S. Trust Company (“U.S. Trust”) served as the Managing Investment Adviser to the Company. Under the Agreement, for the services provided, the Managing Investment Adviser is entitled to receive a management fee at the annual rate of 1.50% of the net assets of the Company, determined as of the end of each calendar quarter, that are invested or committed to be invested in Private Companies or Private Investment Funds and equal to an annual rate of 0.50% of the net assets of the Company, determined as of the end of each calendar quarter, that are invested in short-term investments and are not committed to Private Companies or Private Investment Funds. Prior to June 1, 2003, and pursuant to a sub-advisory agreement (the “Sub-Advisory Agreement”) among the Company, U.S. Trust NY, U.S. Trust and U.S. Trust Company, N.A., U.S. Trust Company, N.A. served as the investment sub-adviser to the Company and received an investment management fee from the Managing Investment Adviser. As of October 31, 2004 and October 31, 2003, respectively, $161,438 and $181,784 were payable to the Managing Investment Adviser.
In addition to the management fee, the Company has agreed to pay the Managing Investment Adviser an incentive fee in an amount equal to 20% of the cumulative realized capital gains (net of realized capital losses and unrealized net capital depreciation) on investments other than Private Investment Funds, 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, the Managing Investment Adviser will be required to repay the Company all or a portion of the incentive fee previously paid. As of, and for the year ended October 31, 2004, October 31, 2003 and October 31, 2002 the Company recouped $0, $0 and $1,356,372 of incentive fees which had been paid by the Company to the Managing Investment Adviser in prior years.
U.S. Trust NY is a New York state-chartered bank and trust company and a member bank of the Federal Reserve System. Effective June 1, 2003, U.S. Trust merged into U.S. Trust Company, N.A., a nationally chartered bank. Pursuant to an assumption agreement dated June 1, 2003, U.S. Trust Company, N.A. assumed the duties and obligations of U.S. Trust under the Agreement. Pursuant to a termination agreement among the Company, U.S. Trust NY, U.S. Trust and U.S. Trust Company, N.A., the Sub-Advisory Agreement terminated on June 1, 2003. As a result, U.S. Trust Company, N.A., acting through its registered investment advisory division, U.S. Trust Company, N.A. Asset Management Division, now serves with U.S. Trust NY, acting through its registered investment advisory division, U.S. Trust-New York Asset Management Division, as Managing Investment Adviser to the Company. The merger had no impact on the management or operations of the investment advisory functions performed for the Company, and did not constitute a change in control. U.S. Trust NY and U.S. Trust Company, N.A. are each 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.
PFPC, Inc. (“PFPC”), a majority-owned subsidiary of The PNC Financial Services Group, provides administrative and accounting services to the Company pursuant to an Administration and Accounting Services Agreement. PFPC Trust Company provides custodian services to the Company pursuant to a Custodian Services Agreement. Also, PFPC provides transfer agency services to the Company pursuant to a Transfer Agency Agreement.
For the services provided to the Company by PFPC and its affiliates, PFPC is entitled to an annual fee of 0.02% of average net assets plus reimbursement of reasonable expenses, and a base fee, payable monthly. Administration fees for the year ended October 31, 2004 amounted to $121,304, of which $25,236 was payable at October 31, 2004. Administration fees for the year ended October 31, 2003 amounted to $169,766, of which $14,318 was payable at October 31, 2003.
The Managing Investment Adviser has voluntarily agreed to waive or reimburse other operating expenses of the Company, exclusive of management fees, to the extent they exceed 0.25% of the Company’s average net assets. This reimbursement amounted to $223,870, $322,717 and $243,246 for the years ended October 31, 2004, October 31, 2003 and October 31, 2002, respectively, which includes a receivable to the Company of $52,122 as of October 31, 2004 and $85,833 as of October 31, 2003.
Each director of the Company 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 the Managing Investment Adviser, or U.S. Trust Corporation or its subsidiaries, who serves as an officer, director or employee of the Company receives any compensation from the Company.
See Note 7 - Subsequent Events.
Note 3 - Purchases and Sales of Securities
Excluding short-term investments, the Company had $0 in purchases and $3,334,000 in proceeds of sales of securities for the year ended October 31, 2004. For the year ended October 31,2004 and October 31,2003, the Company received distributions from Private Investment Funds in the amount of $5,988,012 and $1,968,483, respectively. For year ended October 31, 2003 and October 31, 2002 the amount of purchases were $0 and $16,933,708, respectively, and the amount of sales were $5,305,452 and $43,706,387, respectively.
Note 4 - Transactions with Affiliated Portfolio Companies
An affiliated company is a company in which the Company has ownership of over 5% of the voting securities. No dividend income was received from affiliated companies during the year ended October 31, 2004 and 2003. Transactions with companies, which are or were affiliates are as follows:
Note 5 - Pending Litigation
The Investment Adviser was contacted in September, 2003 by the Office of the New York State Attorney General (the “NYAG”), and the Securities and Exchange Commission (the “SEC”) and later by the Attorney General of the State of West Virginia in connection with their investigations of practices in the mutual fund industry identified as “market timing” and “late trading” of mutual fund shares (the “Investigations”). The Investment Adviser has been providing full cooperation with respect to these Investigations and continues to review the facts and circumstances relevant to the Investigations. As disclosed previously by the Investment Adviser and its affiliates, with respect to the Investment Adviser, these investigations have been focusing on circumstances in which a small number of parties were permitted to engage in short-term trading of certain mutual funds managed by the Investment Adviser. The short-term trading activities permitted under these arrangements have been terminated and the Investment Adviser has strengthened its policies and procedures to deter frequent trading.
The Investment Adviser, and certain of its affiliates, has also been named in five class action lawsuits which allege that the Investment Adviser, certain of its affiliates, and others allowed certain parties to engage in illegal and improper mutual fund trading practices, which allegedly caused financial injury to the shareholders of certain mutual funds managed by the Investment Adviser. The Investment Adviser and certain affiliates have also been named in two derivative actions alleging breach of fiduciary duty in relation to allegedly illegal and improper mutual fund trading practices.
While the ultimate outcome of these matters cannot be predicted with any certainty at this time, based on currently available information, the Investment Adviser believes that the pending Investigations and private lawsuits are not likely to materially affect the Investment Adviser’s ability to provide investment management services to the Company. The Company is not a subject of the Investigations nor party to the lawsuits described above.
Note 6 - Guarantees
In the normal course of business, the Company enters into contracts that provide general indemnifications. The Company’s maximum exposure under these agreements is dependent on future claims that may be made against the Company, and therefore cannot be established; however, based on experience, the risk of loss from such claims is considered remote.
Note 7 - Subsequent Events
On November 23, 2004, the Company engaged Deloitte & Touche, LLP (“D&T”) as the Company’s independent public accountants for the fiscal year ended October 31, 2004, replacing Ernst & Young LLP (“E&Y”), the Company’s prior independent public accountants. E&Y was terminated by the Company on October 28, 2004 as a result of concerns regarding their independence at the time of issuance of their report on the Company’s October 31, 2003 financial statements. These concerns are the result of certain real estate consulting services performed by E&Y on a contingent fee basis for Charles Schwab & Co., Inc., an affiliate of the Company’s Adviser.
On December 16, 2004, Charles Schwab Corporation (“Schwab”) entered into an agreement with the Company and other funds managed by the Adviser whereby Schwab will fund a reserve account to be held by the Adviser or its affiliate. This reserve account was established so that the Company and other funds managed by the Adviser will be able to draw upon it to pay in full all costs incurred related to the termination of E&Y. This agreement was executed in order to ensure that these costs related to the termination of E&Y are not borne by the Company, the other funds managed by the Adviser or their respective shareholders. Schwab is an affiliate of the Company’s Adviser. In consideration of the funding of the reserve account, the Company and the other funds managed by the Adviser subrogated all of their claims, causes of action and rights against E&Y for payment of these expenses to Schwab.
As a result of the agreement with Schwab, the Company has recorded a reimbursement amount of $89,275 in the Statement of Operations for the year ended October 31, 2004 as a reduction of expenses. This $89,275 amount reflects the reimbursement of certain expenses recorded in the Statement of Operations for the year ended October 31, 2004 which relate to termination of E&Y costs paid and accrued. These costs include legal fees, audit fees (related to re-audit and re-review services of D&T), and directors fees and expenses of $14,000, $69,275, and $6,000, respectively.
On December, 9, 2004, the Company paid a dividend of $60.09 per share, or $11,761,416, to shareholders of record on December 6, 2004.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There has been a change in the Company’s independent public accountants (see Note 7 to the financial statements), however there were no disagreements or reportable events.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures. As of October 31, 2004 (the end of the period covered by this report), the Company’s principal executive officer and principal financial officer evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and have concluded that, based on such evaluation, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company was made known to them by others within those entities.
(b) Changes in Internal Controls. There were no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls over financial reporting. Accordingly, no corrective actions were required or undertaken.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the headings “Election of Directors” and “Additional Information-Officers” appearing in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on March 23, 2005, which will be filed with the Securities and Exchange Commission not later than 120 days after October 31, 2004, is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the captions “Election of Directors” and “Additional Information-Officers” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on March 23, 2005, which will be filed with the Securities and Exchange Commission not later than 120 days after October 31, 2004, is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” appearing in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on March 23, 2005, which will be filed with the Securities and Exchange Commission not later than 120 days after October 31, 2004, is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
(a) The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $47,500 for 2003 and $119,000 for 2004.
Audit-Related Fees
(b) The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph (a) of this Item are $0 for 2003 and $0 for 2004.
Tax Fees
(c) The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $8,300 for 2003 and $0 for 2004.
All Other Fees
(d) The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for 2003 and $0 for 2004.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1. Financial Statements
The financial statements listed in Item 8, “Financial Statements and Supplementary Data,” beginning on page 10 are filed as part of this report.
2. Financial Statement Schedules
The financial statement schedules listed in Item 8, “Financial Statements and Supplementary Data,” beginning on page 10 are filed as part of this report.
3. Exhibits
Incorporated by reference to the Company's Registration Statement on Form N-2, (File No. 333-23811), filed with the Securities Exchange Commission on March 24, 1997.
Incorporated by reference to the Company's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders, filed with the Securities and Exchange Commission on May 25, 2000.
Incorporated by reference to the Company's Registration Statement on Form N-2/A (File No. 333-23811), filed with the Securities and Exchange Commission on May 13, 1997.
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on March 18, 2002.
Incorporated by reference to the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on January 29, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: